Financial Services SpeedRead 22 June

1. Taskforce on Innovation, Growth and Regulatory Reform published independent report on re-imagining regulation in the UK

On 16 June 2021, the Taskforce on Innovation, Growth and Regulatory Reform reported its recommendations to the Prime Minister on how the UK can reshape regulation and seize new opportunities from Brexit.

The report makes a number of wide-ranging recommendations and some relate to financial regulations. According to the Government, the recommendations include ideas that could reduce barriers to start-ups and scale-ups, and ensure the UK remains one of the best places to do business. The key recommendations in the report are set out below.

• MiFID: amend disclosure and transparency requirements for financial products. The report argues that requirements should be proportionate for business, and incentivise bespoke information provision to consumers, rather than excessive reports set out to prescriptive templates. For instance, the report refers to the FCA's proposals to suspend RTS 27 reporting requirements (see our previous briefing for further information) and states that this requirement should be removed indefinitely if it can be shown that the reports do not add value.
• MAR: remove the investment recommendation disclosure from MAR for wholesale clients. The report believes that the existing regime is burdensome and costly. It is also not supported by the buy-side it is intended to help.
• PRIIPs: confine the key information disclosure requirement in PRIIPs to genuinely complex products. The report states that these would be products that require special explanation to the retail market and that vanilla bonds should be exempt from the scope. For non-retail, the report recommends that the UK should allow for key information to be provided in less-prescriptive ways than those set out in the PRIIPs Regulation's templates.
• UK FinTech: adopt new regulatory framework that supports UK leadership in FinTech and digitalisation of financial services infrastructure. This and other proposals concerning FinTech in the report echo many of the recommendations set out in the February 2021 report of the Kalifa Review (see our previous briefing for further information).
• Open Banking: mandate the expansion of Open Banking to Open Finance quickly and adopt a more market-style, Australian approach. The report states that the UK should look to return to a principles-based approach to regulation, rather than overly prescriptive technical standards. Further, the report recommends that BEIS should forward its Smart Data legislation as soon as possible this year (rather than the planned timeline of Q1 2022).
• Challenger Banks: increase competition by adopting a graduated regulatory approach to challenger banks. The report argues that aspects of current legislation, such as those relating to capital requirements, may be impeding competition and have not helped to break up the highly concentrated retail banking sector. It states that small banks should be subject to simplest regulation.
• Central bank digital currency (CBDC): accelerate plans to launch a CBDC and launch a pilot within 12-18 months. The report believes that all major central bank currencies will eventually be digitised and notes that many jurisdictions are making plans in this direction.

In a letter in response to the report, the Prime Minister confirmed that the Government will give the report "the detailed consideration it deserves, consult widely across industry and civil society, and publish a response as soon as is practicable".

2. PRA statement on firm authorisation under the Temporary Permissions Regime

On 14 June 2021, the PRA announced it would be extending the time period to process authorisation applications from EEA banks and insurers in Temporary Permissions Regime (TPR), which is currently up to the end of 2023.

According to the PRA, there has been a considerable volume of applicants of varying scale and complexity across a range of different business models, and some firms in TPR may choose not to apply for authorisation until the end of 2022 (or otherwise as the PRA may direct).

As such, the PRA noted that it expects to take authorisations decisions on a case-by-case basis dependent on PRA resourcing and governance processes and it may also result in multiple decisions taken on the same date. This means some firms may receive an authorisation application outcome ahead of others. It further confirmed that the timing of authorisation should not be taken as an indication of the PRA's view of risks at individual institutions.

3. The European Commission publishes EMIR Delegated Regulation extending the clearing obligation exemption for pension scheme arrangements

On 16 June 2021, the European Commission published the Commission Delegated Regulation (EU) 2021/962, extending the transitional period under Article 89(1) of the European Markets Infrastructure Regulation (EU) 648/2012 (EMIR). The initial transitional period for the clearing obligation exemption for pension scheme arrangements has now been extended by a further year, from 18 June 2021 to 18 June 2022.

The Regulation entered into force on 17 June 2021 and is directly applicable in all EU member states.

4. The European Commission publishes EU Taxonomy Compass

On 15 June 2021, the European Commission published the EU Taxonomy Compass which provides a visual representation of the contents of the EU Taxonomy. The Commission stated that, to start with, the EU Taxonomy Compass covers the Taxonomy Climate Delegated Act, which was adopted on 4 June 2021 but has yet entered into force.

The Commission explained that the EU Taxonomy Compass aims to make the contents of the EU Taxonomy easier to access for a variety of users. It enables users to check (i) which activities are included in the EU Taxonomy (taxonomy-eligible activities), (ii) to which objectives they substantially contribute; and (iii) what criteria they have to meet. The EU Taxonomy Compass also aims to make it easier to integrate the criteria into business databases and other IT systems.

Further, the Commission confirmed that the EU Taxonomy Compass will be updated to include future delegated acts specifying technical screening criteria for additional economic activities substantially contributing to the climate objectives and the other environmental objectives of the Taxonomy Regulation.

5. HM Treasury establishes the Green Technical Advisory Group

On 9 June 2021, HM Treasury announced the establishment of the Green Technical Advisory Group (GATG). The GTAG is an independent expert group that will oversee the Government's delivery of a Green Taxonomy – a framework setting the bar for investments that can be defined as environmentally sustainable. It will provide non-binding advice to the Government on the development and implementation of a UK Green Taxonomy, which facilitates more informed investment decisions. According to John Glen, Economic Secretary to the Treasury: "a UK Green Taxonomy will provide better data on the environmental impact of firms, supporting investors, businesses and consumers to make green financial decisions and accelerating the transition to net zero.

GTAG will first meet in June 2021 and is expected to run for at least two years. It will provide initial recommendations to the Government in September 2021. The Government will also establish an Energy Working Group as part of the GTAG to provide advice on key technologies, including hydrogen, carbon capture, utilisation and storage. The Treasury also stated that other expert groups may be established where required as work progresses.
For further information on the GTAG, please refer to our previous briefing.

6. Financial Services Act 2021 (Commencement No 1) Regulations 2021 (SI 2021/671)

On 7 June 2021, the Financial Services Act 2021 (Commencement No 1) Regulations 2021 (SI 2021/671) were published. These Regulations set out commencement dates for provisions in the Financial Services Act 2021 (the Act) concerning the prudential regulation of investment firms and credit institutions.

• Regulation 2 brings into force on 9 June 2021 sections 3,4 and 5 and Schedule 3 of the Act, which transfer certain prudential regulation matters into rules made by the PRA.
• Regulation 3 brings into force on 26 June 2021 section 7 and paragraph 12 of Schedule 4 of the Act for the purpose of amending article 500d of the CRR.
• Regulation 4 brings into force on 1 July 2021 section 2 and Schedule 2 of the Act, which amend the Financial Services and Markets Act 2000 for the purpose of the prudential regulation of certain investment firms by the FCA.
• Regulation 5 brings into force on 1 January 2022 section 1 and Schedule 1 of the Act, which amend the Capital Requirements Regulation and the Capital Requirements (Country by Country Reporting) Regulations 2013.

7. PRA consultation paper: Financial holding companies - further implementation

On 21 June 2021, the PRA published a consultation paper (CP 12/21) setting out proposed rules in respect of consolidated prudential requirements to financial holding companies and mixed financial holding companies approved or designated under Part 12B of FSMA. The proposals are designed to give effect to the changes under onshored CRD V and CRR II which impose direct responsibility for complying with consolidated prudential requirements on approved or designated holding companies.
CP 12/21 also contains:

• appendix 1: draft PRA (Rules applying to holding companies) Instrument 2021 containing amendments to Parts in the PRA Rulebook;
• appendix 2: a new Statement of Policy "Supervisory measures and penalties in relation to financial holding companies"; and
• appendix 3: containing changes to PRA Statement of Policy "The Prudential Regulation Authority's approach to enforcement: statutory statements of policy and procedure" to reflect its application to holding companies.

8. The Basel Committee consults on prudential treatment of cryptoasset exposures

On 10 June 2021, the Basel Committee on Banking Supervision (BCBS) published a consultative document on prudential treatment of cryptoasset exposures. The BCBS stated that while banks' exposures to cryptoasset are currently limited, the continued growth and innovation in cryptoasset, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.

The proposed prudential treatment outlined in the consultation divides cryptoassets into two broad groups:

• Group 1: these fulfill a set of classification conditions and as such are eligible for treatment under the existing Basel Framework (with some modifications and additional guidance). These include certain tokenised traditional assets and stablecoins.
• Group 2: are those, such as bitcoin, that do not fulfill the classification conditions. Since these pose additional and higher risks, they would be subject to a new conservative prudential treatment.

BCBS confirmed that central bank digital currencies are not within the scope of the consultation. The consultation closes on 10 September 2021.

For further information, please refer to our recent briefing.

9. Commission Implementing Regulation sets out ITS under Regulation on cross-border distribution of investment funds

On 15 June, the European Commission published Commission Implementing Regulation (EU) 2021/955 laying down implementing technical standards (ITS) under Articles 5(3), 10(3) and 13(3) of the Regulation on cross-border distribution of investment funds (EU) 2019/1156.

The ITS concern the publication of information by national competent authorities (NCA) on their websites regarding the national rules governing marketing requirements for funds, and the regulatory fees and charges levied by NCAs relating to cross-border activities of fund managers. The ITS also cover the notification of information by NCAs to ESMA for developing and maintaining on ESMA's website a central database listing UCITS and alternative investment funds marketed cross-border.
The Commission Implementing Regulation will enter into force on 5 July 2021, however Articles 1 and 3(1) apply from 2 August 2021, and Article 5 will apply from 2 February 2022.

10. ECB consults on revised SSM fit and proper guide and new fit and proper questionnaire

On 15 June 2021, the European Central Bank (ECB) published a revised version of its guide on fit and proper assessments and a new fit and proper questionnaire for consultation. The guide is aimed at members of the management bodies of significant credit institutions under the Single Supervisory Mechanism (SMM). Under the SSM, the ECB has a supervisory role in relation to banks in EU member states that are part of the EU Banking Union and assessments in relation to whether members of the management body of these credit institutions are fit and proper. The guide is intended to co-exist with the joint guidance provided by ESMA and EBA on suitability and internal governance.

Key changes introduced in the draft guide include:

• giving closer consideration in the guide to severe supervisory findings that may impact an appointee's suitability;
• clarifying that knowledge of and experience in climate-related and environmental risks will be deemed relevant, given the increasing supervisory focus on this area;
• more detail on how board members will be reassessed if new material facts emerge after their appointment; and
• introducing gender diversity as an element of collective suitability (the draft guide provides that the assessment of diversity is interlinked with day-to-day supervision, and any relevant diversity findings in the governance assessments may feed into the assessment of collective suitability).

The deadline for comments is 2 August 2021.

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

11. FCA's Q&A on the proposed consumer duty

In our previous briefing, we covered the FCA's recent consultation paper (CP21/13) on a new Consumer Duty and the six key takeaways around its proposals. On 10 June 2021, the FCA gave its first seminar and Q&As on the proposed Consumer Duty. During the seminar, there were many questions on what Consumer Duty means and how it will affect financial services firms.

12. JURI report on proposed codified Regulation on cross-border payments

On 17 June 2021, the European Parliament's Legal Affairs Committee (JURI) published a report on the European Commission's legislative proposal for a Regulation on cross-border payments in the EU.

The purpose of the proposal is to codify the existing Regulation (EC) 924/2009 on cross-border payments. The new Regulation, which will preserve the content of the existing Regulation as amended, will repeal and replace the existing Regulation.

The report stated that the European Parliament should adopt the European Commission's legislative proposal for the proposed Regulation as its own position at first reading, as adapted to the recommendations of the Consultative Working Party of the legal services of the European Parliament, the Council and the Commission. The report contains a draft European Parliament legislative resolution setting out this position.

13. EPC publishes first version of the Single Euro Payments Area Request-to-Pay scheme rulebook

On 15 June 2021, the European Payments Council (EPC) published the first version of the Single Euro Payments Area (SEPA) Request-to-Pay (RTP) scheme rulebook, which has now entered into force. The SEPA RTP scheme rulebook consists of a set of rules, practices and standards that makes it possible for any eligible SEPA RTP service provider to join, participate and operate in the SRTP scheme.

14. EBA reports on PSP readiness to apply SCA for e-commerce card-based payment transactions

On 11 June 2021, the European Banking Authority (EBA) published a report on the data provided by payment service providers (PSPs) on their readiness to apply strong customer authentication (SCA) for the subset of payment transactions that are e-commerce card-based payment transactions. The report highlights the status of issuing and acquiring PSPs in enrolling online merchants, payment cards and payment service users (PSUs) into SCA-compliant solutions, and in requesting SCA for online payment transactions after 31 December 2020, when the SCA migration period ended. The EBA tracked the progress made by issuing and acquiring PSPs from September 2019 to April 2021 by monitoring a number of indicators that had been set out in the EBA opinion of 2019 on the deadline for the migration to SCA compliance.

Based on the data collected from the PSPs, the EBA observed that significant progress has been made over the past 9 months with regard to SCA-compliance. This progress also coincided with a significant reduction of the volume and value of fraud, for the same type of transactions and the same time period. The report also notes that there are still PSPs in some jurisdictions that are lagging behind others in enabling SCA on their payment cards; enrolling PSUs to SCA-compliant authentication solutions; or initiating SCA-compliant transactions.

15. Payments Systems Regulator consults on strategy for the next five years

On 10 June 2021, the Payments Systems Regulator (PSR) published a consultation paper setting out its proposed five-year strategy (CP21/7). The PSR stated that its proposed strategy sets out an approach that aims to make sure payments and payment systems work well for everybody and that there is a fair competition and access to payments for all.

In CP21/7, the PSR identified four strategic outcomes it wants to see in payments over the next five years and proposed four associated priority work areas to enable it to deliver against those outcomes. These priorities are set out below.

• Ensure users have continued access to the payment services they rely upon and support effective choice of alternative payment options.
• Ensure users are sufficiently protected when using the UK's payment systems, now and in the future.
• Promote competition in markets and protect users where that competition is not sufficient, including (i) between payment systems within the UK and (ii) in the markets supported by them.
• Ensure the renewal and future governance of the UK's interbank payment systems supports innovation and competition in payments.

The consultation closes on 10 September 2021. In addition to gathering written feedback, the PSR will be holding two stakeholder webinars on 23 June and 30 June to discuss the above four priorities.

16. FCA publishes cryptoasset consumer research

On 17 June 2021, the FCA published a Research Note: Cryptoasset Consumer Research 2021. The research estimates that 2.3 million adults now hold cryptoassets, up from 1.9 million last year and 78% of adults have now heard of cryptocurrencies. As holding cryptoassets has become more common, the research shows that attitudes towards them have changed. The report notes that 38% of crypto users regard them as a gamble (down from 47% last year), while increasing numbers see them as either a complement or alternative to mainstream investments.

By contrast, although the profile of cryptocurrencies has risen, the level of overall understanding of cryptocurrencies is declining, suggesting that some people who have heard of crypto may not fully understand what they are buying. Further the research shows that one in ten who had heard of cryptocurrency said they are aware of consumer warnings on the FCA website. Of these, 43% said they were discouraged from buying cryptocurrency. Sheldon Mills, FCA's Executive Director, Consumers and Competition, stated that "it is important for customers to understand that because these products are largely unregulated that if something goes wrong they are unlikely to have access to the FSCS or the Financial Ombudsman Service. If consumers invest in these types of products, they should be prepared to lose all their money."

The FCA reiterated that it will continue working closely with HM Treasury and other regulators, including through the UK Cryptoasset Taskforce.

17. The Alan Turing Institute: Report: AI in Financial Services

On 14 June 2021, the Alan Turin Institute published a report on artificial intelligence commissioned by the FCA. The report is aimed at firms using or thinking of using artificial intelligence and machine learning and will inform the FCA's future work in relation to digital markets.

The report is divided into four key sections

• introduction to AI: the report defines AI as "the science of making computers do things that require intelligence when done by humans". It explains central technological concepts (such as symbolic AI, statistical AI, General AI, Narrow AI and Machine Learning) and highlights the relationship between them. It also explores elements of technological change that drive AI innovation in financial services;
• general challenges and guiding principles for responsible AI adoption: this part of the report notes the benefits offered by AI, as well as challenges in relation to managing the trustworthiness and responsible use of AI systems. The report examines how AI-related risks arise and the role of AI ethics principles in guiding responsible innovation;
• benefits and harms in financial services: this part of the report looks at the positive and negative impacts that different uses of AI in financial services could have in the areas of consumer protection (looking at issues such as unlawful discrimination and unfair differential treatment), financial crime (for example the use of customer identification methods) and stability of firms and markets; and
• AI transparency and its importance for responsible innovation: the report states that AI transparency is essential in order to encourage take-up of AI in financial services. It considers the forms AI transparency can take, the purposes it can serve, and relevant practical considerations.

18. FCA announces cohort 7 of the regulatory sandbox

On 10 June 2021, the FCA announced that 13 firms have been accepted into cohort 7 of the regulatory sandbox to test innovative products and services. The FCA stated that in the wider context of coronavirus, it was interested in seeing more innovation and testing from firms developing businesses, products or services intended to detect fraud and scams, support the financial resilience of vulnerable consumers, or improve access to finance for small and medium-sized enterprises.

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