Financial Services SpeedRead: 25 March 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. Official Journal of the European Union: Legislation: Directive and Regulation to improve MiFID II and MiFIR market data access and transparency published in Official Journal

On 8 March 2024, the following were published in the Official Journal of the EU: 

• Directive (EU) 2024/790 amending the MiFID II Directive (2014/65/EU) (the MiFID Amending Directive); and
• Regulation (EU) 2024/791 amending the Markets in Financial Instruments Regulation (600/2014) as regards enhancing data transparency (MiFIR) (the MiFIR Amending Regulation).

The MiFID Amending Directive and MiFIR Amending Regulation introduce changes to the MiFID II and MiFIR regime in order to improve access to market data and transparency. In particular the amending legislation:

• introduces an EU-wide consolidated tape, mandating contribution of market data to consolidated tape providers for both equity and non-equity instruments traded in the EU by trading venues and approved publication arrangements as close to real time as technically possible; and
• prohibits payment for order flow, such that financial intermediaries will be required to select the trading venue or counterparty for a transaction solely on the basis of achieving best execution for their clients.

The amending legislation will enter into force on 28 March 2024 (20 days after their publication in the Official Journal). The MiFIR Amending Regulation will then apply immediately, whilst member states will have until 29 September 2025 to transpose the MiFID Amending Directive to their local laws. 

2. FCA: Statement: FCA updates position on cryptoasset Exchange Traded Notes for professional investors

On 11 March 2024, the FCA published a statement updating its position on cryptoasset Exchange Traded Notes (ETNs) for professional investors.

The FCA stated that it will not object to requests from Recognised Investment Exchanges (RIEs) to create a UK listed market segment for cryptoasset backed ETNs, with such products to instead remain available for professional investors only. RIEs will need to continue to implement adequate controls, so trading is orderly and sufficient protection is afforded to professional investors. ETNs must also meet all requirements of the UK Listing Regime, such as rules relating to prospectuses and ongoing disclosure.

The FCA confirmed that the ban on the sale of crypto derivatives to retail consumers remains in place, and reminded consumers that cryptoassets are high risk and largely unregulated.

3. HMT: Consultation: Improving the effectiveness of the Money Laundering Regulations

On 11 March 2024, HMT published a consultation on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs) to prevent money laundering and terrorist financing. 

HMT is consulting on changes to the MLRs as a part of a broader work programme focused on reducing money laundering, as laid out in the Economic Crime Plan 2023-26.

There are four critical themes to the consultation:

• making customer due diligence more proportionate and effective;
• strengthening system coordination;
• clarifying the scope of the MLRs; and
• reforming registration requirements for the Trust Registration Service.

The consultation closes on 9 June 2024, and can be responded to in a number of manners, including answering the questions via the online form.

Banking and Prudential

4. Single Resolution Board: Consultation: Minimum Bail-In Data Template

On 13 March 2024, the Single Resolution Board (SRB) published a public consultation on the adoption of the Minimum Bail-in Data Template (MBDT). 

The minimum bail-in data points were updated in June 2022, requiring banks to self-assess themselves to ensure they have adequate management information systems to identify and produce the requisite data points within 24 hours. The SRB is considering adopting the MBDT to implement the bail-in data set instructions and explanatory note, by enhancing definitions and providing a template and guidance to ensure structured and standardised data collection across banks under the SRB's remit. 

The consultation aims to gather stakeholders' views on the following:

• content of the MBDT documentation;
• data point model and format; and
• data collection process.

The consultation closes on 8 May 2024, and can be responded to via the SRB's survey.

5. PRA: Policy statement: Solvent exit planning for non-systemic banks and building societies (PS5/24)

On 12 March 2024, the PRA published a policy statement setting out its feedback to responses to its consultation paper on solvent exit planning for non-systemic banks and building societies (CP 10/23), along with its final policy, including the following:

• Chapter 7 of the Recovery Plans Part of the PRA Rulebook;
• supervisory statement (SS 2/24) – solvent exit planning for non-systemic banks and building societies; and 
• updated SS 3/21 – non-systemic UK banks: the PRA's approach to new and growing banks.

The PRA received eight responses to its consultation paper which generally supported its proposals on solvent exit policy and planning. Having considered the responses, the PRA has clarified its expectations in its final policy, making the following key changes:

• further clarity and elaboration of a firm's solvent exit planning for the transfer and/or repayment of all deposits, and the removal of a firm's Part 4A PRA permission;
• clarification that a firm's solvent exit indicators are intended to inform a firm as to when it may need to initiate a solvent exit, but that they are not automatic triggers for a solvent exit;
• the addition of examples of stakeholders in a firm's solvent exit planning on communication;
• clarification that a firm may perform assurance activities internally or externally, as the firm deems appropriate; 
• further details on key firm considerations for exit valuations; and
• general editorial amends for clarity and consistency.

Recovery Plans Chapter 7 will come into force on 1 October 2025, and firms are expected to meet the expectations set out in SS 2/24 by the same date. 

Funds Management

6. ESMA: Guidelines: Stress test scenarios under the MFF Regulation

On 6 March 2024, the European Securities and Markets Authority (ESMA) published the official translation (including in English) of the guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation (Regulation (EU) 2017/1131). 

The objective of the guidelines is to ensure common, uniform and consistent application of the provisions of Article 28 of the MMF Regulation. The guidelines establish common reference parameters of the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs, considering the following factors specified in Article 28(1) of the MMF Regulation:

• hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
• hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
• hypothetical movements of the interest rates and exchange rates;
• hypothetical levels of redemption;
• hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied; and
• hypothetical macro systemic shocks affecting the wider economy.

The guidelines will apply from 6 May 2024, with the exception of the parts in red which will apply from the dates specified in Articles 44 and 47 of the MMF Regulation. The guidelines will then be updated at least every year to take into account the latest market developments. 

7. HMT/FCA: Statutory instrument and statement: Changes to the Financial Promotions Order – high net worth exemption 

On 6 March 2024, HMT published the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment and Transitional Provision) Order 2024 (SI 2024/301) (FSMA Order), together with an Explanatory Memorandum.

By way of background, the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) provides exemptions from the restriction on communicating financial promotions, including an exemption that enables financial promotions for unlisted companies to be made to high net worth individuals and self-certified sophisticated investors. 

The FSMA Order amends the high net worth individual (article 48) and self-certified sophisticated investor (article 50A) exemptions in the FPO. The 2023 Order also applied these changes in relation to the promotion of collective investment schemes, by amending the similar relevant exemptions set out in the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (S.I. 2001/1060) (the PCIS).

The changes made by the FSMA Order can be summarised as follows:

• Reducing the financial thresholds to be eligible for the high net worth individual exemption to:
  • Income of at least £100,000 in the last financial year; or
  • Net assets of at least £250,000 throughout the last financial year;
• Amending the criteria to be eligible for the self-certified sophisticated investor exemption by:
  • Reinstating the criterion of having made two or more investments in an unlisted company in the previous two years; and
  • Reducing the company turnover required to satisfy the “company director” criterion to £1 million (i.e. individuals who have been directors of companies with at least £1 million turnover in the last two years will remain eligible for the self-certified sophisticated investor exemption); and
• Providing that investor statements that comply with the FSMA Order will remain valid until and including 30 January 2025. 

The FSMA Order comes into force on 27 March 2024. 

Senior Managers and Governance

No new entries. 

Financial Crime

8. FCA: Dear CEO Letter: Action needed in response to common control failings identified in anti-money laundering frameworks

On 5 March 2024, the FCA published a Dear CEO Letter warning firms about common failings the FCA has found in firms' financial crime controls. 

The FCA reiterated that the prevention of money laundering, terrorist financing and proliferation financing (together, Financial Crime) is an area of significant focus. 

The FCA reviewed the Financial Crime policies, controls and procedures of a number of the firms it supervises under the MLRs. Common weaknesses were identified in the following areas:

• Business model: discrepancies between firms' registered and actual activities, and lack of Financial Crime controls to keep pace with business growth;
• Risk assessment: weaknesses in Business Wide Risk Assessments and Customer Risk Assessments;
• Due diligence, ongoing monitoring and policies and procedures: insufficient detail in Financial Crime policies, leading to ambiguity around actions staff should take to comply with their obligations under the MLRs; and
• Governance, Management Information and training: insufficient resources for Financial Crime, inadequate training and absence of a clear audit trail for Financial Crime-related decision making.

The FCA expects firms to complete a gap analysis against each of the common shortcomings it has set out within six months of receipt of the letter. The FCA expects firms to take prompt and reasonable steps to close any gaps identified, with the senior manager responsible for the gap analysis having sufficient seniority to carry out the exercise effectively.

The FCA confirms that it is likely to follow up on such work in future engagements with firms, and an inadequate response to this letter may result in regulatory intervention.

Retail Services

9. ESMA: Q&A: Consolidated Q&As on the PRIIPs Key Information Document

On 15 March 2024, ESMA published an updated version of their consolidated Q&A on the PRIIPs Key Information Document (KID). ESMA has made clarifications in a number of areas, including, but not limited to:

• the term "PRIIPs open to subscription"; 
• the difference between a "benchmark" and a "proxy" within the meaning of the Commission Delegated Regulation (EU) 2021/2268; 
• whether an artificially created “synthetic” proxy could be considered an appropriate proxy in accordance with the PRIIPs RTS Annex II and Annex IV; 
• whether currency risk described by Risk Element C is applicable to investment funds; and
• whether a KID should disclose cost information and scenario information about one year and half the recommended holding period, in case the investors may not be allowed to exit a PRIIP before the end of the recommended holding period.

10. FCA: Press release: Review of firms' treatment of customers in vulnerable circumstances

On 15 March 2024, the FCA published a press release announcing its review of firms' treatment of customers in vulnerable circumstances. 

This announcement follows the FCA's 2021 commitment, and will involve the FCA looking at firms’ understanding of consumer needs, the skills and capability of staff, product and service design, communications and customer service, and whether these support the fair treatment of customers in vulnerable circumstances. 

The FCA will also look at the outcomes consumers in vulnerable circumstances receive and whether they are as good as the outcomes of other consumers.    

The FCA intends on sharing its findings by the end of 2024.

11. FCA: Response: FSB's super-complaint requiring personal guarantees for business loans

On 5 March 2024, the FCA published its response to a super-complaint submitted by the Federation of Small Businesses (FSB) on 8 December 2023. The FSB raised concerns that a growing demand for personal guarantees by lenders has negative consequences for small businesses (particularly small limited companies), which in turn discourages them from borrowing funds to grow. 

The FCA stated, as acknowledged in the super-complaint, that lending to limited companies does not fall within its regulatory perimeter. However, with respect to lending that does fall within its remit, the FCA will:

• collect data (from April to June 2024) to understand the number of personal guarantees in place for sole traders and small partnerships borrowing less than £25,000;
• review a sample of firms' policies and procedures to understand when personal guarantees are required for loans that come under the FCA's remit;
• work with the FOS to observe the number of complaints regarding or linked to this matter; and
• examine whether lenders require further guidance on applying the FCA's rules and guidance within the Consumer Credit Sourcebook to situations where a personal guarantee is arranged. The FCA will consult and publish guidance as necessary in this regard.

The FCA will share any relevant information, including any issues identified outside of its remit, with the appropriate Government departments, particularly HM Treasury as it considers reforming the Consumer Credit Act 1974.

Payments

12. HM Treasury: Policy note: The Payment Services (Contract Terminations Amendment) Regulations 2024

On 14 March 2024, HM Treasury published a near-final draft of the Payment Services (Contract Terminations Amendment) Regulations 2024, alongside a policy note.

The draft statutory instrument sets out requirements that will apply to providers of payment services within the scope of regulation 51 of the Payment Services Regulations 2017. The core reforms to the draft statutory instrument apply to provider-initiated terminations of framework contracts concluded for an indefinite period and entered into on or after the day the instrument would come into force. The key changes are summarised as follows:

• the notice period for provider-initiated terminations of framework contracts concluded for an indefinite period is increased from the current two months to 90 days;
• providers will be required to give affected users a sufficiently detailed and specific explanation so the customer can understand why their particular contract is being terminated;
• clarification is provided that it is prohibited to insert clauses in contracts which avoid the new termination requirements by providing for discharge of the contract by agreement;
• specific circumstances may disapply some or all of the requirements to ensure that providers can continue to meet other requirements and duties; and 
• corresponding changes are made to rules concerning the refusal of applications for and termination of basic bank accounts in regulations 25 and 26 respectively of the Payment Accounts Regulations 2015.

The government intends to lay the draft statutory instrument before Parliament in summer 2024, such that the instrument will commence as soon as practical thereafter. Technical comments on the draft instrument will be considered by the HM Treasury and can be submitted to contractterminationstechnicalcomments@hmtreasury.gov.uk. 

13. HM Treasury: Policy Note: The Payment Services (Amendment) Regulations 2024

On 12 March 2024, HM Treasury published a policy note on the near-final version of the Payment Services (Amendment) Regulations 2024, which will enable payment service providers (PSPs) to slow down payments processing in situations where there are reasonable grounds for them to suspect fraud.

The legislation is specifically intended to tackle rising levels of Authorised Push Payment (APP) fraud, which relates to circumstances where payers are tricked into authorising payments to criminals. Once enacted, the instrument would allow PSPs to delay the execution of certain payment orders in order that the PSP can decide whether the order should be executed.

Further, where the PSP chooses to delay, the legislation also makes provisions as to how and when the payer should be notified of the delay, as well as with respect to liability for any charges or interest incurred by the payer as a consequence.

The Government has invited technical comments on the draft statutory instrument by 12 April 2024 to Jamie.Slater@hmtreasury.gov.uk, and intends to lay the legislation before parliament in summer 2024.

Digital Services and Fintech

14. EBA: Consultation Paper: Draft Guidelines on redemption plans under Articles 47 and 55 of Regulation (EU) 2023/1114

On 8 March 2024, the European Banking Authority (EBA) published a consultation paper on the Guidelines for the plans to orderly redeem asset-referenced tokens (ARTs) or e-money tokens in the event an issuer fails to fulfil their obligations under the Markets in Crypto Assets Regulation (MiCAR).

The draft Guidelines lay down the framework for issuers of ARTs when drawing up their redemption plan, as well as for competent authorities when assessing such plans. The draft Guidelines also:

• emphasise the principle of proportionality and the elements necessary to consider to ensure appropriate detail in the redemption plan;
• clarify the broad principles which govern the redemption plan, including the equitable treatment of token holders;
• outline the steps that are to be taken for the orderly and timely implementation of the plan;
• consider the case of pooled issuance (i.e. where the same token is issued by multiple issuers) and detail the governance requirements relating to the same; and
• outline the Triggers for the activation of the redemption plan by the competent authority and the cooperation with the prudential and resolution authorities.

The deadline for feedback is 10 June 2024, and the Guidelines will come into force two months after the publication of the translations in all official languages.

ESG

No new entries. 

Other

15. House of Commons (Treasury Committee): Report: Sexism in the City (HC 240)

On 8 March 2024, the Treasury Committee (the Committee) published a report on its Sexism in the City inquiry, which was launched following a 2018 report by the Committee's predecessor to determine how much had changed to improve gender diversity within the financial services industry and reduce barriers faced by women in the workplace that contribute to gender inequity (including poor workplace cultures and unconscious bias).

The Committee concluded that predominantly as a result of a lack of cultural change in the sector, many of the barriers previously identified remain stubbornly in place, with sexual harassment and bullying still prevalent in the industry. 

The Committee has stated that responsibility for tackling these issues and driving cultural change sits with the senior leadership and boards of firms, with firms needing to embed a "zero-tolerance culture" towards harassment and bullying in the workplace. Based on the evidence submitted to the Committee, including through the oral evidence session, the Committee has made a number of recommendations which it considers will assist with addressing these issues, including:

• legislation to ban the use of non-disclosure agreements (NDAs) in cases of sexual harassment; 
• stronger protection for whistleblowers;
• a ban on future employers requesting previous salary history;
• a legal requirement to include salary bands on job advertisements; 
• reducing the size threshold for gender pay gap reporting;
• a requirement for businesses with wider gender pay gaps to explain the disparity and publish an action plan; 
• regulators to release plans for extensive diversity data reporting and target setting; and
• general changes to the Women in Finance Charter.

The FCA separately published a statement confirming that they will prioritise its diversity and inclusion proposals (as set out in its consultation CP 23/20), including amendments to its rules to tighten expectations on firms' approaches to tackling misconduct, and consider the Committee's recommendation in respect of how the FCA engages with boards and other senior leaders on their firms' culture.

For more information, please see our Ashurst thought-piece here.

16. HM Treasury: Spring Budget 2024: Key regulatory updates

On 6 March 2024, HM Treasury published the Spring Budget for 2024, announcing the following key financial regulatory updates:

• Private Intermittent Securities and Capital Exchange System (PISCES): HM Treasury is currently consulting on its plans to use a Financial Market Infrastructure sandbox to develop a venue for private companies to trade their securities in a controlled environment and on an intermittent basis (PISCES). PISCES incorporates elements from public markets, such as multilateral trading, and elements from private markets such as greater discretion on what company disclosures should be made public. HM Treasury intends to lay secondary legislation before Parliament later in 2024 to set up PISCES. The consultation closes on 17 April 2024.
  
• High net worth (HNW) and sophisticated investor criteria: the Government plans to legislate to reinstate the previous eligibility criteria to qualify as a HNW or sophisticated investor and will carry out further work to review the scope of the exemptions (please see entry number ‎4 above for more detail).
• Reserved Investor Fund (RIF): the Government published new tax rules for RIFs (with detailed rules to be set out by statutory instrument at a later date) and a summary of the responses it received to its consultation on RIFs. Notably, the government will proceed with the three restricted RIFs proposed in its consultation, namely RIFs where:

• At least 75% of the value of its assets are derived from UK property;
• All the investors are exempt from tax on gains; or
• The fund does not directly invest in UK property or UK property-rich companies.

The summary also details how the Finance (No 2) Bill 2024 will define a RIF, which will be classed as an unauthorised contractual scheme and therefore will not be subject to FCA authorisation under section 261D of the Financial Services and Markets Act 2000. Notwithstanding this, managers of RIFs will need to be FCA authorised as RIFs will still be classed as collective investment schemes and as AIFs (as defined by regulation 3 of the Alternative Investment Fund Managers Regulations 2013). RIFs will also be subject to the FCA's marketing rules for non-mass market investments.