Financial services speedread 23 February 2022

1. European Commission: New consultation on suitability and appropriateness of retail investments

On 21 February 2022, as part of its retail investment strategy, the European Commission launched a targeted consultation to collate views on how to improve suitability and appropriateness assessments for retail investments.

The targeted consultation seeks to find specific ways to make assessing retail clients' investment needs and constraints simpler and more client-focused. The consultation explores the possibility of introducing new types of suitability and appropriateness tests, namely an improved client assessment regime and a personalised asset allocation strategy. The Commission is also exploring the potential for the new client assessment and allocation strategy to be transferred to any financial intermediary, and to what extent such intermediaries can depart from the personalised asset allocation strategy.

The deadline for responses is 22 March 2022.

2. FCA: 2 month delay to processing change in control notifications

On 18 February 2022, the FCA updated its webpage on how to submit a change in control notification to outline how it will respond to the recent high volumes of section 178 notifications.

The FCA highlights that there is currently a delay of approximately two months between submitting a complete notification and allocating a case officer. The FCA explains that a substantial number of incomplete notifications contribute to further delays and recommends providing all relevant information for initial submissions.

As part of the FCA's transformation programme outlined in its business plan for 2021/22 (see FCA's 2021/22 business plan: First strategic overarching outcomes and metrics), the FCA is recruiting additional case officers and making improvements to decrease the time between allocating and determining cases.

3. Capital Markets Union: Extension for UK CCP equivalence and new consultation on EU clearing activities

On 8 February 2022, the European Commission published a press release confirming that equivalence for UK central counterparties (CCPs) will be extended until 30 June 2025.

To reduce the EU's reliance on systematic third-country CCPs, the European Commission also announced the launch of a targeted public consultation and call for evidence on expanding central clearing activities in the EU and increasing the attractiveness of EU CCPs. The deadline for responses is 8 March 2022.

The European Commission plans to put forward measures to advance EU clearing activities during the second half of 2022.

4. FCA speech: Enhancing UK's capital markets

On 8 February 2022, the FCA published a speech by Sarah Pritchard, Executive Director, Markets, on enhancing the UK's capital markets.

Areas of focus in the speech include:

• Transformation of the FCA: Ms Pritchard reiterates the FCA's plan to become a more innovative, assertive, and adaptive regulator and one that is data-led;
• The future regulatory framework: Ms Pritchard states that the FCA welcomes the proposals contained in HM Treasury's paper to transfer significant pieces of onshored legislation into the FCA Handbook, and that it is a critical opportunity to create a rulebook that meets the needs of the UK as well as enhances the attractiveness of UK capital markets; and
• What to expect in 2022: Ms Pritchard confirms the FCA will be publishing its overarching consumer and markets strategies outlining priorities and focus in the future. Areas of focus will be capital markets, future regulatory framework, ESG and transformation of the FCA.

No updates for this edition of the FSS

5. UK funds regime review: Summary of responses to call for input

On 10 February 2022, HM Treasury published a summary of responses to the government's call for input on its review of the UK funds regime.

Although the government is willing to take full advantage of the proposals respondents have put forward, it is not possible for them to take all these opportunities forward immediately. The government (and FCA where applicable) propose to prioritise the following areas in the short term:

• Review of the genuine diversity of ownership (GDO) condition to examine whether any reforms are needed;
• Further consideration of options to address the tax inefficiency of UK authorised funds, particularly multi-asset funds;
• A workstream centred on additional reforms to Real Estate Investment Trusts (REITs), which will encompass how REITs interact with the new asset holding company (AHC) regime;
• More engagement with the industry to find out what additional information authorised fund managers would find useful regarding the application process;
• A working group made up of HM Treasury, HMRC and the FCA to advance work on allowing the distribution of capital by authorised funds which ensure sufficient consumer protection and an appropriate tax treatment;
• Promotion of the UK's fund offering overseas and working with industry on more opportunities; and
• Additional work to explore options for introducing a new unauthorised contractual scheme fund structure which is closed-ended and non-listed.

Other areas the government is focusing on include:

• A consultation on ways to simplify the VAT treatment of fund management fees;
• Continued work on the rollout of the new Long-Term Asset Fund (LTAF), which involves: (i) the ongoing work of the Productive Finance Working Group; (ii) an FCA consultation on possibly changing the restrictions on promoting LTAFs to retail investors; and (iii) an ongoing assessment of any further changes to how LTAFs are taxed.

The government welcomes further stakeholder representation and engagement on all the proposals put forward already, as well as on wider issues or new proposals affecting the UK funds regime.

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

6. Cayman Islands will be high AML risk in Europe in March 2022

On 21 February 2022, Commission Delegated Regulation (EU) 2022/229 (Delegated Regulation) was published in the Official Journal of the European Union. The Delegated Regulation contains amendments to the list of high-risk third countries requiring enhanced due diligence under MLD4 (as amended by MLD5).

The Delegated Regulation has added a number of countries to the list of high risk countries including, most notably, the Cayman Islands.

The Delegated Regulation will come into force on 13 March 2022.

7. UK JMLSG: Revisions to syndicated lending guidance

On 17 February 2022, following on from a consultation in December 2021, the Joint Money Laundering Steering Group (JMLSG) published a new paragraph 17.29A to be inserted into Part II Sector 17 (Syndicated Lending) of its anti-money laundering and counter-terrorist financing guidance.

Paragraph 17.29A covers the completion of customer due diligence (CDD) by lenders for syndicated lending. Under the new guidance, lenders should adopt a risk-based approach when evaluating what CDD is available for the borrower under a syndicated loan before becoming a lender of record under the facility documentation.

The revised guidance has been submitted to HM Treasury for approval.

8. Council of the EU Cover Note: Opinion of the ECB on July 2021 package to overhaul EU AML / CTF rules

On 17 February 2022, the Council of the EU published an opinion of the European Central Bank (ECB) on the legislative proposal for a Directive and Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. For detail on the proposed European AML /CTF package please see our briefing here.

Although the ECB welcomes the initiatives reflected in the legislative proposals, it recommends that the proposed legislation is amended in several areas:

• the definition of obliged entities: the ECB asks for clarification that ESCB central banks are excluded from the definition of obliged entities;
• the impact of the limitation on payments in cash: the ECB states that cash remains important as a payment instrument for many in the EU and that any cash payment limitation needs to be explained to the public via suitable means;
• risk factors for customer due diligence: the ECB suggests that the definition of public administrations needs to be clarified so that it also covers public authorities and bodies (and includes central banks) and enterprises;
• cryptoassets: the ECB opinion suggests that a broader, technology-neutral definition of cryptoassets would be more compatible with Financial Action Task Force (FATF) recommendations.

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

9. EPC Consultation: Standardisation of QR-codes for mobile initiated payments

On 16 February 2022, the European Payments Council (EPC) issued a consultation on a new draft document for the Standardisation of Quick-Response (QR)-codes for mobile initiated (instant) credit transfers (MSCTs). The document has been developed by the Multi-stakeholder Group on Mobile Initiated SEPA (Instant) Credit Transfers (MSG MSCT).

At the meeting, the Euro Retail Payments Board (ERPB) made the following recommendations to the MSG MSCT:

• extend the current QR code standard specifications to a “generic QR code standard” (covering P2P, B2C, B2B and invoice payment);
• launch a public consultation on this “generic QR code standard” for MSCTs; and
• prepare and publish a final version of the “generic QR code standard” following the consultation.

The document issued by the MSG MSCT for consultation standardises a payee and a payer-presented QR-code for all types of MSCTs, i.e. all payment contexts (person-to-person, consumer-to-business, business-to-business and business to consumer).

The document contains a section devoted to the security of the data contained in the QR-codes.

10. ASA issues advice on marketing cryptoassets

On 14 February 2022, ASA issued online advice as to how the CAP Code applies to advertisements for cryptoassets. In particular, the guidance provides that advertisers must:

Clearly state that cryptoassets are not regulated by the FCA nor protected by the Financial Compensation Schemes and that this statement is presented in a sufficiently clear and prominent way, taking into account size, legibility, and placement of the text, as well as the nature of the medium of the advert;

• Not take advantage of consumers' inexperience or credulity. Advertisements must be easily understandable and should not use financial jargon;
• Include all material information, e.g. making clear that something is a cryptoasset, and if investors need to first buy a different cryptoasset (token A) in order to swap token A for the advertised cryptoasset then this should be clear ;
• Make clear that value can go down as well as up and that cryptocurrencies can be extremely volatile;
• State the basis used to calculate any projections or forecasts; and
• Make clear that past performance is not a guide for future performance.

11. FCA issues statement on buy now, pay later firms changing contract terms

On 14 February 2022, the FCA published a statement on its changes to Buy Now, Pay Later (BNPL) firms' contract terms, which summarised the changes made by four BNPL firms.

Clearpay, Klarna, Laybuy and Openpay have cooperated with the FCA in order to make changes to their contract terms following the FCA's assessment of the fairness and transparency requirements under sections 62 and 68 of the Consumer Rights Act 2015. In particular, the FCA were concerned with the following four topics:

1. Terms setting out what happens if a consumer cancels the contract for purchases funded by a BNPL loan: the FCA expressed concern that a loan agreement was not always terminated in circumstances where consumers exercised their right to cancel the online sales contract by returning all the goods.
2. Terms enabling the firms to terminate and/or suspend a consumer's account or access to services: the FCA were concerned that the terms could be used to terminate and / or suspend a consumer's account without notice for any reason or restrict access to the consumer's account.
3. Right of set-off terms: the FCA are concerned that the terms could be used by firms to inappropriately exclude the consumer's set off rights.
4. Continuous payment authority terms (CPA): the FCA expressed concern that the terms did not clearly state how a consumer could cancel a CPA.

All four firms have amended their terms to address the FCA's concerns.

The FCA have also provided guidance for firms to use when reviewing their terms.

The press release can be viewed here.

12. ESMA Speech by Verena Ross: Keeping on track in an evolving digital world

On 9 February 2022, ESMA published a speech given by its chair, Verena Ross.

In the speech, Ms Ross considers the impact of digitalisation on financial services. She argues that it is the job of regulators to consider the implications of new technology and innovations and decide which types will make a lasting impact.

Notable areas of focus in the speech include:

• A world of new influences and expectations: the pandemic has encouraged the growth of online brokers, who have seen a marked increase in new accounts and in their trading activities. ESMA plans to monitor the activities of 'Finfluencers' (i.e. social media influencers) and it will seek to modify its communications to aim to reach consumers who seek information from social media;
• A new digital marketplace in finance: digital platforms are serving as new venues for financial (and non-financial) products and the fragmentation and complexity of the financial services value chain is being encouraged by entry of bigtech and fintech. Supervisors need a clear view of the roles played by these new market entrants and the dependencies between them. Supervisors also need to understand their data-focused business culture; and
• Cryptoassets: ESMA is also working actively with national supervisors to ensure information exchange about cryptoassets products and services, ahead of an agreement being reached on Markets in Crypto-Assets regulation.

No updates for this edition of the FSS

13. European Parliament issue proposals on Consumer Credit Directive

On 8 February 2022, the draft report on the proposal for a directive of the European Parliament and of the Council of consumer credits (dated 31 January 2022) was published.

The proposal, put forward by the European Commission, broadens the scope of the Consumer Credit Directive for example by widening the scope of hiring and leasing agreements.

The proposal attempts to "future-proof" the Directive by including future credit services within its scope.

Other proposals include consideration of advertising, pre-contractual information, creditworthiness assessment, CAPs, green loans and debt collection.