Legal development

Financial Services SpeedRead: 8 February 2024 edition

Insight Hero Image

    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. HM Treasury: Legislation: The Data Reporting Services Regulations 2024 are published 

    On 31 January 2024, HM Treasury published the Data Reporting Services Regulations 2024 with an accompanying Explanatory Memorandum. The statutory instrument replaces retained EU law in relation to Data Reporting Service Providers (DRSPs) and forms part of the Government's initiative to deliver a smarter regulatory framework following the UK's exit from the EU.

    DRSPs are commercial entities that publish trade reports on behalf of investment firms to enable them to fulfil their regulatory reporting obligations. They also ensure the accessibility of market data and facilitate effective price formation and best execution. 

    The statutory instrument sets out the perimeter and supervisory aspects of the new DRSP regime, including the FCA's ability to run a tender process to select one or multiple consolidated tape providers for a particular asset class.

    The statutory instrument is informed by feedback to the Wholesale Markets Review consultation published in July 2021, in relation to which respondents suggested that a tender process for a UK consolidated tape would make it easier for UK authorities to ensure that the correct governance arrangements are in place, mitigate conflicts of interest, and keep the costs low for firms connecting to and accessing data from a tape.

    The statutory instrument will come into force once the Data Reporting Services Regulations 2017 is revoked.

    2. FCA: Newsletter: Market Watch 76

    On 30 January 2024, the FCA published its Market Watch 76 newsletter detailing its observations on "flying" and "printing" and how firms can mitigate the risks of misleading the market by their staff engaging in these behaviours.

    Market Watch 76 references Market Watch 57, which described flying and printing as follows: 

    • Flying: a firm communicating to its clients, or other market participants, via screen, instant message, voice or other method, that it has bids or offers when they are not supported by, or sometimes not even derived from, an order or a trader's actual instruction.
    • Printing: communicating, via screen, instant message, voice or other method, that a trade has been executed at a specified price and/or size, when no such trade has taken place.

    The FCA has observed a continuation of such activity in several markets and cases of firms' management failing to deal with this behaviour in a robust and timely way.

    Accordingly, the FCA sets out the ways in which firms can mitigate the risks of the harms caused by flying and printing, which include ensuring:

    • compliance manuals and procedures prohibit flying and printing, and that annual attestations of compliance are obtained;
    • training includes the nature of and the prohibition of flying and printing and the consequences of such behaviours;
    • robust surveillance procedures for the identification and reporting of flying and printing are in place; and
    • disciplinary procedures are clear and consistent.

    The FCA concludes that it will not hesitate to intervene where it suspects behaviours that are detrimental to confidence in, and the fairness of, UK markets.

    Banking and Prudential

    3. PRA: Consultation paper: The PRA's approach to rule permissions and waivers

    On 31 January 2024, the PRA published a consultation paper on its proposal for a new statement of policy (SoP) which will set out its approach to rule permissions and waivers made under section 138BA of the Financial Services and Markets Act 2023 (FSMA 2023) (CP 3/24).

    FSMA 2023 gave the PRA a new power to, on application or with the consent of a person subject to its rules, grant permissions to firms that either waive or modify the application of PRA rules. The proposed SoP is aimed at improving clarity and transparency over the criteria the PRA will use to assess applications under section 138BA of FSMA 2023, in order that the industry is clearer on the PRA's expectations when making such applications.

    The proposed SoP has the following three key messages:

    • the criteria or factors which the PRA expects to take into account when assessing specific rule permissions under section 138BA FSMA 2023 will generally be communicated in subject specific SoPs which the PRA may publish;
    • when assessing applications made under section 138BA FSMA for rule permissions where approval criteria have not been set out in subject specific SoPs, the PRA expects to consider and place significant weight upon the statutory criteria that apply to the PRA's power under section 138A FSMA 2023; and
    • for applications for rule permissions and waivers, the PRA will expect detailed information and evidence demonstrating how the relevant criteria are met.

    The consultation closes on 30 April 2024, with comments or enquiries to be directed to CP3_24@bankofengland.co.uk. The PRA proposes to publish the final SoP in June 2024. 

    4. BoE: Policy Statement: The BoE's approach to enforcement

    On 30 January 2024, the BoE published a policy statement (PS 1/24) providing feedback on the responses it received to its May 2023 consultation paper regarding proposed changes and clarifications to the BoE's approach to enforcement (CP 9/23).

    The consultation paper received 20 responses which were generally supportive of the BoE's and PRA's proposals to enhance the clarity, transparency and accessibility of its enforcement procedures. The majority of respondents welcomed the introduction of a structured pathway for early, meaningful cooperation with investigations. 

    As a result of some feedback received, the BoE confirms in the policy statement that it has made further changes to the draft policy which was put forward in the consultation, including:

    • clarifying the applicability of the Early Account Scheme (EAS) or the Enhanced Settlement Discount;
    • clarifying the scope of the senior manager attestation which will need to supplement any early account provided by a firm or Financial Market Infrastructure (FMI);
    • making minor amendments to the matrix which provides the starting point for calculating fines for PRA authorised firms;
    • updating the serious financial hardship thresholds for individuals; and
    • amending and clarifying Annex 2, Chapter 6 of the BoE enforcement approach regarding the availability of the EAS in FMI investigations.

    The changes resulting from the policy statement came into force on 30 January 2024. The BoE clarifies that where a breach begins before 30 January 2024 and continues after that date, two different regimes will apply. The penalty, suspension and restriction regime in place before 30 January 2024 will apply to conduct before that date, and the new penalty, suspension and restriction regime will apply to conduct from that date onwards.

    5. PRA: Final notice: PRA fines HSBC for failures in deposit protection identification and notification

    On 30 January 2024, the PRA published a final notice and news release of its £57,417,500 fine issued against HSBC Bank plc (HBEU) and HSBC UK Bank plc (HSBC) (together, the Firms) for historic depositor protection failings arising from the Firms' failures to properly implement the requirements set out in the Depositor Protection Rules (DPRs).

    The PRA detailed that the relevant period of contravention for HBEU was between 2015 and 2022, and for HBUK between 2018 and 2021.

    The PRA states that the Firms' breaches included failures to:

    • assign clear ownership for the processes required under the DPRs; and
    • ensure a senior manager, under the Senior Managers and Certification Regime, was allocated responsibility for these processes and the integrity of the information required under the DPRs.

    According to the PRA, HBEU's additional failings included:

    • incorrectly marking 99% of its eligible beneficiary deposits as "ineligible" for FSCS protection;
    • providing an incorrect attestation to the PRA confirming its systems satisfied certain requirements of the DPRs; and
    • failing to produce finalised versions of annual reports required to be signed by its board of directors confirming compliance with the requirements of the DPRs for multiple years.

    As such, the PRA found that the Firms breached Fundamental Rules 2 and 6 as well as DPRs 11, 12 and 14; with HBEU to have further contravened DPR 50, and Fundamental Rules 7 and 8. 

    In its press release, the PRA confirmed that this fine is the second highest imposed by the PRA, which it states reflects the seriousness of the contraventions, and that this is the first PRA enforcement action against a firm relating to Fundamental Rule 8.

    6. PRA: Report: Review of ring-fencing rules

    On 25 January 2024, the PRA published a report setting out its conclusions from its review on ring-fencing, which had been conducted throughout 2023. 

    Although most rules on ring-fencing are set out in legislation, the PRA's review was only conducted in relation to those requirements set by the PRA in its Rulebook and supporting supervisory statements. 

    The PRA concludes that most rules are performing satisfactorily and appear to be well understood by firms, with no significant gaps having been identified. The PRA sets out proposed improvements to the rules which it will consult on after a fuller exploration of the costs and benefits of options identified, as follows:

    • rules relating to the provision of services to ring-fenced bodies from non-ring-fenced parts of a group;
    • rules relating to arm's length transactions;
    • modifications of rules relating to governance arrangements; and
    • rules relating to regulatory reporting. 

    7. HM Treasury and BoE: Consultation Paper Outcome: Outcome on consultation regarding implementing the BoE Levy 

    On 25 January 2024, HM Treasury and the BoE published the outcomes and next steps of their November 2023 consultation papers on draft regulations to implement the BoE levy, which is to replace the Cash Ratio Deposits Scheme. 

    In its consultation paper, HM Treasury sought views on a draft version of the statutory instrument that would introduce the levy and also provided an overview of the draft regulations. HM Treasury has now considered the two responses to the consultation and noted that no questions were raised on the drafting of the proposed regulations. 

    Similarly, the BoE's consultation paper explained how the annual levy would be charged and how it would operate, and requested feedback on specific questions. The BoE received one response to its consultation paper, which it has now summarised and responded to. 

    The Government has now published The Bank of England Levy (Amount of Levy Payable) Regulations 2024, as well as its Explanatory Memorandum. Subject to the Regulations receiving Parliamentary approval, the BoE will commence the BoE levy. 

    8. European Commission: Report to the European Parliament and the Council on the macroprudential review for credit institutions, the systemic risks relating to Non-Bank Financial Intermediaries and their interconnectedness with credit institutions

    On 24 January 2024, the European Commission published a report to the European Parliament and Council on its review of the EU macroprudential framework for credit institutions, as set out in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV), as required under Article 513 of the CRR. 

    The review was initially due by June 2022, but was postponed to ensure the following were properly assessed: 

    • the effects of the COVID-19 pandemic and post-pandemic macroeconomic conditions;
    • the growth of Non-Bank Financial Intermediaries (NBFIs); and
    • the March 2023 US banking crisis.

    The report references numerous studies by EU and international bodies, as well as a public consultation conducted by the Commission and the results of bilateral discussions with stakeholders. 

    The Commission outlines its future plans in this area, which includes:

    • continued work on macroprudential policies for banks and ensuring compliance with the Basel III framework, taking into account that the overall level of capital and minimum requirement for own funds and eligible liabilities requirements are deemed adequate;
    • running a targeted consultation on macroprudential policies for NBFIs in 2024 to collect further insights on the gaps in the macroprudential framework and other factors that might contribute to systemic risks in non-bank financial intermediation; and
    • consulting on the review of the Securities Financing Transaction Regulation, which aims to improve transparency on funding and lending transactions and allow for better monitoring of risks resulting from non-bank credit intermediation.

    Funds Management

    9. House of Commons: Statement: Update on the Overseas Funds Regime

    On 30 January 2024, the House of Commons published an update on the Overseas Funds Regime (OFR). The statement, made by the Economic Secretary to HM Treasury, confirmed the Government's decision to treat European Economic Area (EEA) states, including EU member states, as equivalent under the OFR.

    The equivalence decision will apply to UCITs, except those which are also money market funds. 

    While the Government does not intend to require the funds assessed to comply with any additional UK requirements at present, it will continue to monitor the equivalence decision on an ongoing basis.

    Moreover, the Government also confirmed that it intends to extend the temporary regime allowing EEA funds to continue marketing in the UK to the end of 2026, to facilitate the transition to the OFR.

    The equivalence decision will be enacted via secondary legislation in due course. Separately, the Government intends to consult on whether to broaden the scope of the sustainable disclosure requirements to include funds recognised under the OFR.

    Senior Managers and Governance

    No new entries.

    Financial Crime

    10. HM Treasury: Statutory instrument: The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024 (No. 69) 

    On 23 January 2024, HM Treasury published a statutory instrument (SI) amending regulation 33(3)(a) of the MLRs 2017, alongside an Explanatory Memorandum.

    The SI redefines "high-risk third countries" (HRTCs) as those identified by the Financial Action Task Force (FATF) in the lists that they publish from time to time, as "High-Risk Jurisdictions Subject to a Call for Action" and "Jurisdictions Under Increased Monitoring". The SI also removes Schedule 3ZA, which set out the list of "High-Risk Third Countries". 

    This legislation aims to streamline updates to the list of HRTCs. By referring firms directly to the jurisdictions published in the FATF lists, this removes the need for multiple SIs per year and allows the Government to respond more quickly to international findings.

    The SI came into force on 23 January 2024.

    Retail Services

    11. FCA: New webpage: Information for firms on motor finance complaints

    On 24 January 2024, the FCA published a webpage setting out information for firms affected by its review into the historical use of discretionary commission arrangements (DCAs) in the motor finance industry.

    As part of its review, the FCA introduced new rules that came into force on 11 January 2024 which:

    • pause, for 37 weeks, the requirement for firms to provide a final response to a complaint about motor finance agreements with DCAs within eight weeks of receiving the complaint; and
    • extend the time consumers have to refer DCA complaints to the Financial Ombudsman Service from six to 15 months, if the firm sent its final response to the complaint within the period specified in the rules.

    The FCA states that firms affected by the changes must comply with the rules in Appendix 5 of the Dispute Resolution: Complaints Sourcebook that are relevant to their business.

    The FCA provides further information and guidance on its expectations for firms, including compliance with the Consumer Duty, record retention requirements and maintaining adequate financial resources. 

    Payments

    No new entries.

    Digital Services and Fintech

    12. ESMA: Consultation paper: Draft guidelines on reverse solicitation under the Markets in Crypto Assets Regulation (MiCA)

    On 29 January 2024, ESMA published a consultation paper on draft guidelines related to the conditions for the application of the reverse solicitation exemption under MiCA, and the accompanying supervision practices that national competent authorities may take to prevent its circumvention. 

    In the guidelines, ESMA highlights that the exemption should be understood as very limited and narrowly framed and should therefore not be used by EU-based firms to circumvent MiCA. The guidelines also provide guidance on the meaning of solicitation, which according to ESMA should be construed very broadly. Further, the draft guidelines specify the conditions for the application of the exemption, with a particular focus on timing and how to assess whether a third-country firm is marketing new types of crypto-assets or crypto-asset services to a client.

    The consultation closes on 29 April 2024, following which ESMA will consider the feedback and expects to publish a final report at the end of 2024 at the latest.

    13. ESMA: Consultation paper: Draft Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments

    On 29 January 2024, ESMA published a consultation paper on draft guidelines related to the classification of crypto-assets as "financial instruments", as defined in MiFID II. 

    Article 2 of MiCA provides that MiCA does not apply to crypto-assets that qualify as financial instruments as defined in Article 4(1) of MiFID II. MiFID II in turn does not include a one-size-fits-all definition for all types of financial instruments, therefore there is no commonly-adopted application of the definition of a "financial instrument" across EU member states.

    The proposed guidelines aim at providing national competent authorities and market participants more clarity about the delineation between the respective scopes of application of MiCA and MiFID II in order that there are consistent approaches at the national level regarding which crypto-assets are considered financial instruments. ESMA's goal is for the guidelines to provide national competent authorities and market participants with structured yet flexible general conditions and criteria to determine whether a crypto-asset can be classified as a financial instrument, whilst avoiding a one-size-fits all approach. 

    The consultation closes on 29 April 2024. ESMA then intends to publish a report with a final version of the guidelines by 30 December 2024. 

    ESG

    14. FCA: New webpage: Sustainability disclosure and labelling regime

    On 2 February 2024, the FCA published a new webpage relating to the Sustainability Disclosure Requirements (SDR) and investment labels regime. 

    The webpage provides further guidance on the application of the new measures contained in the regime, including setting out implementation timeframes and detailing how firms ought to prepare to ensure compliance with the new measures. This includes considering if they wish to label products that aim to achieve sustainability outcomes and assessing products against the naming and marketing requirements. Firms have also been advised to notify the FCA where they propose to use a label and prepare all required disclosures before the rules come into effect, in accordance with the staggered implementation times under the SDR.

    For more information, please see here our briefing on the FCA's Policy Statement relating to the SDR and investment labelling regime.

    15. EBA: Industry survey: The classification of exposures to ESG risks

    On 29 January 2024, the EBA published an industry survey for input from credit institutions on their methodologies to classify exposures to ESG risks. 

    The purpose of the survey is to collect qualitative information on credit institutions' current and planned practices for the identification and qualification of exposures to ESG risks, including information on the availability and accessibility to the relevant data. This information will be used to assist the EBA's work on the feasibility of introducing a standardised methodology to identify and qualify exposures to ESG risks. 

    The industry survey has been launched as part of the EBA's obligations under the revised banking package (the CRR, as amended by the proposed Regulation amending the CRR), to assess:

    • the availability and accessibility of relatable and consistent ESG data for each exposure class; and
    • the feasibility of introducing a standardised methodology to identify and qualify the exposures based on a common set of principles for ESG risk classification, using: (a) information on transition and physical risk indicators made available by sustainability disclosures reporting frameworks (EU and internationally); (b) guidance arising from the supervisory stress-testing or scenario analysis of climate-related financial risks conducted by the EBA or the competent authorities; and (c) the relevant ESG score of the ECAI credit risks rating by a nominated external credit assessment institution.

    Institutions that wish to take part in the survey must express interest via the following email address: eba-esg-risks-classification@eba.europa.eu. The EBA will then grant access to the survey, and the deadline for submitting responses is 29 March 2024.

    16. ECB: Report: ECB publishes a report on alignment of banking sector with EU climate objectives

    On 23 January 2024, the European Central Bank (ECB) published a report on the results of its assessment of the alignment of the EU banking sector with the EU climate objectives.

    The assessment analysed 95 EU banks covering 75% of euro area loans. It found that banks' credit portfolios were substantially misaligned with the goals of the Paris Agreement, leading to elevated transition risks for roughly 90% of these banks, primarily in the form of elevated credit risk.

    Other key points of the report include:

    • the risks from the transition towards a decarbonised economy can have a significant effect on the credit portfolio of a financial institution;
    • if the transition towards a decarbonised economy becomes disorderly, there will be a growing need to quantify the transition risks in banks' credit portfolios;
    • based on forward-looking production data for assets within the sectors most impacted by the shift towards a low-carbon economy, the report assesses the risk stemming from the misalignment of banks' financing with EU policy objectives;
    • the euro area banking sector shows substantial misalignment and may therefore be subject to increased transition risks, and around 70% of banks are also subject to elevated reputational and litigation risk;
    • a more in-depth analysis reveals the underlying factors contributing to the elevated transition risk in credit portfolios, which largely stems from financing counterparties that are either too slow to phase out their high-carbon production capacities or too slow to build out their renewable energy production capacity; and
    • banks can apply the approach used in the report to further develop their alignment assessment capabilities to help determine the transition risks they face as well as meet the impending disclosure requirements under the EBA’s Implementing Technical Standards on Pillar 3.

    Other

    No new entries.

    image

    Stay ahead with our business insights, updates and podcasts

    Sign-up to select your areas of interest

    Sign-up