Legal development

Financial Services SpeedRead: 30 January 2025 edition

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    Financial Markets

    1. European Commission adopts MiFIR Delegated Regulation regarding OTC derivatives and transparency requirements

    On 24 January 2025, the European Commission published the text of delegated regulation supplementing MiFIR (the Delegated Regulation) and which aims to specify the identifying reference data to be used with respect to OTC derivatives for the purposes of the transparency requirements under MiFIR.

    The Delegated Regulation specifies eleven attributes that will be relevant for the purposes of the transparency requirements in MiFIR for OTC interest rate swaps, plus an additional requirement applicable to both OTC interest rate swaps and OTC credit default swaps.

    The Delegated Regulation states that, in order to allow enough time for ESMA to specify how these attributes should be reported and for necessary adjustments to IT systems, the attributes should only be used from 1 September 2026. Until then, OTC interest rate swaps and OTC credit default swaps will continue to be identified in accordance with the rules currently in place.

    The Delegated Regulation will enter into force and apply on the twentieth day after its publication in the Official Journal of the European Union.

    2. ESMA announces new MiFID DPE Regime and ends SI data publication

    On 24 January 2025, ESMA published a press release announcing the commencement of a new designated publishing entities (DPEs) regime, alongside an immediate end to the publication of systematic internaliser (SI) data. This change follows the transfer of responsibility for reporting OTC transactions from SIs to DPEs pursuant to MiFIR II.

    The new regime for the reporting of OTC transactions regarding post-trade transparency will come into effect on 3 February 2025, and will allow NCAs to grant the status of DPE to investment firms. DPEs involved in a transaction must make this public through an approved public arrangement.

    Further, the implementation of MiFID II amendments will void the requirement for ESMA to perform SI calculations, effective from September 2025. Therefore, ESMA has decided to immediately discontinue the voluntary publication of quarterly SI calculations data. This measure will also alleviate the administrative burden on investment firms, and will no longer apply from 1 February 2025 unless investment firms continue to opt into the SI-regime.

    3. FCA issues portfolio letter on strategy to wholesale brokers

    On 24 January 2025, the FCA published a portfolio letter to wholesale brokers to notify them of its new strategy for supervision.

    The FCA has considered some of the key harms that brokerages operating in wholesale financial markets may pose to the markets and their clients, including in relation to prudential risk management, financial crime, remuneration and non-financial misconduct. Following its engagement with firms regarding these issues over the last two years, the FCA has set out its strategy for the next two years, with four key areas of focus:

    • broker conduct, e.g. insider trading and market abuse;
    • culture, e.g. policies and procedures for reporting NFM concerns;
    • business oversight, e.g. use of remuneration tools; and
    • financial resilience, e.g. contingency funding plans and frameworks.

    The FCA states if a firm is not meeting its standards, the CEO must promptly notify the FCA and outline the steps being taken to address any breaches. By the end of March 2025, the FCA expects all CEOs to have discussed this letter with their directors and/or Board and to have agreed on actions and next steps.

    4. UK reforms to the bank ring-fencing regime are published

    On 14 January 2025, the published Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2025 (the Order) which implements reforms to the regulatory regime applying to ring-fenced bodies.

    The Order amends the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) Order 2014 (CAO) and the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (EAPO). Several changes have been introduced by the Order, for example:

    • raising the core deposit threshold for inclusion in the ring-fencing regime from £25bn to £35bn;
    • introducing new optionality for ring-fenced banks in how they structure their businesses and the products and services they can offer to customers;
    • relaxing the restrictions on geographical operations; and
    • introducing a four-year transition period so that banks acquired by ring-fenced banks have time to comply with the regime.

    The Order comes into force on 4 February 2025 (as per the correction published on 14 January 2025).

    Banking and Prudential

    5. PRA sets out its priorities for supervision of international banking and designated investment firms and UK Deposit-Takers in two Dear CEO Letters

    On 21 January 2025, the PRA published two Dear CEO Letters detailing its priorities for international banking and designated investment firm  (see link here) and UK deposit-taker supervision in 2025 (see link here). 

    These include:

    • Risk management, governance and controls: Firms' senior management and boards must ensure their organisations have robust governance, risk management and controls frameworks in place, commensurate with their business model;
    • Data risk: The PRA will continue to monitor the accuracy and timeliness of regulatory returns;
    • Financial resilience: The PRA will continue to assess these risks, and expects to see firms consider and manage risk to a range of forward-looking liquidity and capital indicators and to use stress-testing to assess their financial resilience;
    • Operational resilience: By March 2025, Firms must show they can remain within impact tolerances for all important business services for severe but plausible disruptions. The PRA also proposes a FCA/PRA consultation in the second half of 2025 in relation to policy regarding the management of ICT and cyber risks; and
    • The 'strong and simple' framework: The PRA detailed the impact of delays to Basel 3.1 implementation, including reduction of the transitional periods.

    In relation to UK deposit taker supervision, the PRA identified similar priorities to those set out above in relation to (i) risk management, governance and controls; (ii) data risk; (iii) operational resilience; and (iv) the 'strong and simple' framework. 

    The PRA also identified an additional priority in relation to funding and liquidity for UK deposit takers, highlighting that firms' boards should seek assurance from their treasury and risk management functions about the effectiveness of balance sheet management.

    Firms should monitor their control frameworks against the PRA's expectations, and expect further action in these areas as set out in the letter.

    6. PRA delays implementation of Basel 3.1 in the UK

    On 17 January 2025, the PRA published a press release announcing its delay of the implementation of Basel 3.1 in the UK. 

    After consultation with HMT, this implementation will be pushed back by a year until 1 January 2027 to provide more time to consider the plans for implementation of Basel 3.1 in the United States. The new implementation date of 1 January 2027 is still subject to monitoring of further developments, and the transitional periods for the reforms will be reduced to ensure the full implementation date remains 1 January 2030.

    In light of this delay, the PRA are pausing its firm data collection exercise with regard to Pillar 2 capital requirements with immediate effect, and further extending the window to join the interim capital regime. The PRA seek to provide further information in due course.

    Fund Management

    No new entries.

    Senior Managers and Governance

    No new entries.

    Financial Crime

    7. FCA assesses the risk of Money Laundering Through the Markets

    On 23 January 2025, the FCA published the findings of its review into Money Laundering Through the Markets (MLTM), which is the use of capital markets to launder cash from criminal activities in order to make it appear legitimately generated. The FCA assessed MLTM threat by reviewing systems and controls in place for managing the risk of financial crime.

    Although the FCA identified examples of good practice, they want to see further action from firms to tackle MLTM threat. The FCA stated that firms need to continue to review the effectiveness of their systems, controls, and training to tackle financial crime, in particular firms should:

    • appropriately document MLTM risk and reflect this in their business-wide risk assessment, systems and controls;
    • integrate transaction monitoring into financial crime systems and controls;
    • carry out firm-wide and role-specific MLTM training;
    • ensure awareness of the UK Financial Intelligence Unit MLTM SAR glossary code; and
    • consider sharing of information in light of the Economic Crime and Corporate Transparency Act 2023

    Whilst the analysis involved a sample of wholesale brokerage firms, the FCA emphasises that its findings should be considered by all firms in the market.

    8. FCA reviews firms' use of the National Fraud Database and money muling detection tools

    On 23 January 2025, the FCA published the outcomes of its review of account providers' use of the National Fraud Database (maintained by Cifas) (NFD) and a money mule account detection tool which can trace the proceeds of fraud across the Faster Payments System.

    The FCA reviewed multiple cases across 13 firms where accounts suspected of money muling were identified. It aimed to understand how the use of the NFD and the money mule account detection tool supports firms' approach to combatting fraud, and the challenges in using these tools effectively.

    Key areas for improvement included:

    • significant variability in the reporting of money mules to the NFD;
    • delays in identifying new fraud markers applied to existing customers due to lack of real-time checks; and
    • firms failing to comprehensively record the outcomes of their fraud investigations.

    Firms are encouraged to conduct reviews and improve their systems and controls for fraud detection and prevention.

    Retail Services

    9. FCA submissions relating to appeals before the Supreme Court on motor finance

    On 20 January 2025, the FCA published its proposed grounds of intervention relating to the appeal of the Court of Appeal decision in Johnson v FirstRand Bank Ltd (London Branch) t/a Motonovo Finance [2024] EWCA Civ 1282.

    In summary, the FCA submitted that the Supreme Court is likely to gain assistance from hearing from it, in particular in relation to:

    • the proper approach to the interpretation of its rules and related legislation;
    • the interaction between private law remedies and the regulatory framework; and
    • the broader context of the motor finance and related consumer markets.

    The FCA also stresses that the outcome of the Supreme Court case will likely have a material impact on whether it decides to proceed with a consumer redress scheme.

    If permission is granted, the FCA will intervene in writing and also orally for up to one hour in the three-day hearing in the Supreme Court.

    10. FCA publishes reply to Lord Michael Forsyth's questions on motor finance commissions

    On 17 January 2025, the FCA published its reply to Lord Michael Forsyth's letter dated 20 December 2024 relating to motor finance commissions.

    In the letter, Lord Forsyth asked the FCA two questions on motor finance, the first being which FCA Rules and Principles it had in place concerning discretionary and fixed commissions, both prior to, and following, amendments in 2021. Secondly, whether the FCA took legal advice in connection with its decision to ban discretionary commission arrangements (and if so, when and from whom the advice was sought).

    In response to Lord Forsyth's first question, the FCA lists relevant CONC Rules and FCA Principles, as well as referencing the Consumer Duty and requirements under the Consumer Credit Act 1974. The FCA also confirmed that it did not seek legal advice in relation to formulating and amending the rules establishing the ban on discretionary commission arrangements, because up to the point of the Court of Appeal decision in Johnson & others, there was clear judicial guidance to factor into an assessment of likely protections.

    Digital Finance and Fintech

    11. BoE and HMT publish dual reports on the introduction of a digital pound

    On 14 January 2025, the BoE and HMT published two reports on the digital pound project. The first report is a progress update on the digital pound and the evolving payments landscape over the past year (see link here), and the second is a blueprint framework for the project (see link here). The BoE and HMT are exploring a digital pound as a complement to banknotes, providing an additional payment method for households and businesses. This digital currency would be exchangeable with cash and bank deposits and foster private sector innovation.

    In terms of progress, the project is currently in the design phase, with implementation to follow subject to Parliament's approval. Further public consultation will precede the introduction of primary legislation, and regular updates on progress and design specifics will be published in due course.

    The blueprint outlines the BoE's ideas around the potential aims and scope of the project. The BoE and HMT will maintain communication with stakeholders, including banks, fintechs, merchants and charities, through current forums and new publications. The aim is to keep stakeholders informed and involved during the design phase, allowing them to offer input to the design process.

    Feedback on the digital pound blueprint framework can be provided via email to CBDC@bankofengland.co.uk.

    Payments

    12. FCA and PSR set out next steps for open banking

    On 23 January 2025, the FCA and Payment Services Regulator (PSR) (together, the Regulators) published a statement discussing the success of the UK open banking system in 2024, and setting out proposed next steps for its continued  growth. The statement focused primarily on the introduction of variable recurring payments.

    The Regulators stated that variable recurring payments will allow consumers to take greater control over their regular payments; and will also benefit businesses by increasing competition, reducing processing fees, and ensuring more payments are completed by customers.

    The new independent central operator for variable recurring payments, Open Banking Limited, is intended to play a key part in coordinating such payments. In particular, services for consumers to make recurring payments to (i) financial services institutions; (ii) government; and (iii) utility companies are expected to go live in 2025.

    The Regulators encourage continued collaboration from industry this year, which will be overseen by a joint FCA and PSR steering committee.

    13. EBA repeals major incident reporting guidelines under PSD2 to accommodate DORA implementation

    On 17 January 2025, the EBA published a press release announcing the repeal of its guidelines on major incident reporting under the Payment Services Directive. This decision is in response to the implementation of harmonised incident reporting under DORA, effective from 17 January 2025. The repeal aims to streamline major incident reporting for payment service providers (PSPs) and ensure legal clarity in the market.

    The EBA repealed these Guidelines entirely, because:

    • the number of other types of PSPs that fall out of scope of DORA is very low and they hold no significant market share at the EU level;
    • these PSPs operate in fewer than half of the EU Member States and offer services only at national level; and
    • the incident reports received from these PSPs at the EU level are both few in number and insignificant in impact.

    The EBA notes that PSPs still subject to incident reporting requirements under PSD2 may be governed by national incident reporting requirements, irrespective of the EBA Guidelines. Competent authorities wishing to maintain the incident reporting approach outlined in the EBA Guidelines for these PSPs can continue to do so within their national legal framework or supervisory measures.

    ESG

    14. EU Platform on Sustainable Finance (EC) publishes report, 'Building trust in the transition for sustainable finance'

    On 23 January 2025, the Platform on Sustainable Finance, an advisory body to the EC, published a report detailing its analysis to support financial market participants' assessment of the core elements of transition plans. The report highlighted four elements that participants should consider when assessing corporate transition plans, including:

    • science-based and time-bound targets;
    • key levers and mitigation actions, i.e. plans should detail the key actions, including technological upgrades, to achieve its targets;
    • financial planning, i.e. plans should be integrated with the participant's overall financial strategy; and
    • effective governance and oversight of the plan and its implementation (i.e. by the board and audit committee oversight).

    The report made several recommendations to the EC to enhance the effectiveness of the EU's policy framework on transition plans. Key recommendations include:

    • creation of a common transition plan template based on the EU framework;
    • developing criteria for selecting credible science-based scenarios for target setting and for qualifying targets as credible and science-based; and
    • developing a public registry of emission reduction data divided by sector to accurately track implementation of transition plans.

    15. EBA publishes consultation paper containing draft guidelines on ESG scenario analysis

    On 16 January 2025, the EBA published a consultation paper containing draft guidelines on ESG scenario analyses, supplementing its guidelines published on 9 January of this year on the management of ESG risks.

    The guidelines set out expectations for institutions when adopting forward-looking approaches and incorporating the use of scenario analysis as part of their management framework to test their financial and business model resilience to the negative impacts of ESG factors. The EBA has set out principles that institutions can use to test their financial resilience, capital and liquidity in response to ESG-related shocks. The guidelines are intended to ensure the safety and soundness of institutions in the short to long term.

    Comments on the draft guidelines can be made until 16 April 2025. The EBA intends to finalise the guidelines by the second half of 2025, to apply from 11 January 2026 (for institutions other than small and non-complex institutions, and from 11 January 2027 for small and non-complex institutions.

    Other

    16. FCA updates webpage in relation to criminal background checks for change in control notifications and cryptoasset registration under the MLRs

    On 17 January 2025, the FCA published updates to its webpage on submitting a change in control notification, to require individual controllers and beneficial owners to have undertaken criminal background checks no more than 6 months prior to any notification of intended change of control/acquisition.

    The FCA requires applicants in England and Wales to obtain standard checks (or basic if unavailable) from the Disclosure and Barring Service (DBS). Applicants based outside of the United Kingdom should supply evidence of equivalent checks.

    Applicants are also asked to set out any changes that have occurred since the check was undertaken within the notification.

    On the same day, the FCA also updated its "Cryptoassets: AML / CTF regime - Registering with the FCA" webpage with the same requirements in relation to beneficial owners of the firm, although only basic DBS checks are required for such applications.

    17. FCA and PRA respond to government call for regulators to support growth

    On 17 January 2025, the FCA published a letter from Nikhil Rathi, Chief Executive of the FCA, to the Prime Minister, Chancellor, and Secretary of State (FCA Letter). The Letter, dated 16 January 2025, was sent in response to the Prime Minister's letter of 24 December 2024, which enclosed the Chancellor of the Exchequer's recommendations regarding a "new approach to ensure regulators and regulations support growth".

    In the FCA Letter, Nikhil Rathi states growth will be a "cornerstone" of the FCA's strategy through to 2030; and sets out certain areas that the FCA have identified as requiring greater Government action and support, it in order to enhance and expediate progress, including:

    • unlocking capital investment and liquidity;
    • improved digital innovation and digital infrastructure planning;
    • reduction of the regulatory burden (including removing unnecessary regulation);
    • maximising the ease of "starting-up" for firms;
    • improving international exports, and inward investments; and
    • increased certainty, predictability, and clarity.

    Nikhil Rathi emphasises the FCA's commitment to taking greater risks and prioritising resources in the pursuit of growth; and to collaborating with the Government to achieve rapid progress. 

    On 20 January 2025, the PRA published its own response letter, from Sam Woods, Deputy Governor and CEO of the PRA, dated 15 January 2025, (PRA Letter). The PRA letter endorses the Government's drive towards sustainable economic growth and "responsible risk-taking" and states that these goals align with the PRA's secondary objectives.

    In the PRA Letter, Sam Woods also sets out a number of actions and initiatives undertaken and due to be undertaken by the PRA to facilitate economic growth and competitiveness. He also describes a number of areas which the PRA would like to explore in collaboration with the Government, including:

    • introducing 'concierge services' for new inbound foreign firms;
    • rationalising the volume and complexity of principles the UK financial services regulators are required to 'have regard' to; and
    • identifying overlaps between the PRA's governance with that of other regulators and legislation.

    The FCA and PRA Letters set out the focus of the regulators' growth agenda for the coming years, including potential new initiatives for firms to consider the impact of.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.