Financial Services SpeedRead: 22 June 2023 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. FCA: Quarterly Consultation No. 40: Deferral regime for transactions in ETFs priced at NAV

On 2 June 2023, the FCA proposed a deferral in the reporting requirements for transactions in ETFs priced at net asset value (NAV), due to the unnecessary operational costs the current regime. The deferral would allow firms and trading venues to defer publication of transactions undertaken to after the publication of the ETF's NAV.

The FCA considered whether the benefits of volume reporting transactions in this space warranted the increased administrative burdens and costs on firms. The FCA found that the implementation of the deferral regime would only lead to 0.7% fewer trades and 2.7% less transaction volume being reported real time. The FCA has suggested that the deferral regime be implemented in line with the amendments to post-trade transparency that are to be brought into effect on 29 April 2024.

2. FCA: Feedback Statement (FS23/2): Decisions on USD LIBOR

On 31 May 2023, the FCA published Feedback Statement (FS23/2) on the previous consultation on decisions on USD LIBOR. The FCA reiterates that key changes that market participants should be prepared for include:

• the overnight and 12-month USD LIBOR settings will cease after final publication on 30 June 2023;
• the 1-month, 3-month, and 6-month USD LIBOR settings will be published in synthetic form from 3 July 2023 until end-September 2024, for use in legacy contracts only (other than in cleared derivatives); and
• all new uses of remaining USD LIBOR settings will be prohibited, overriding the exemptions the FCA permitted to the restriction on new use imposed from 1 January 2022.

The FCA expects market participants to take all necessary steps to understand how their contract terms interact with the USD LIBOR winddown, and must be prepared for the continued transition away from LIBOR.

3. ESMA: Final Report: Market Outages

On 24 May 2023, ESMA published its Final Report on market outages, following its report on algorithmic trading in September 2021 in which ESMA committed to providing guidance on how trading venues should communicate with market participants in case of an outage.

ESMA mandates that NCAs require trading venues to have appropriate outage plans in place to communicate with stakeholders, including sending a notice of disruption to members, participants and the public, to reopen trading in an orderly manner, and to avoid an outage affecting the closing auction so that the market is provided with an official closing price.

Outage plans must set out each step that needs to be performed and the person or function with responsibility for its execution, and be reviewed at least every two years.

Banking and Prudential

4. FCA: Quarterly Consultation No. 40: Changes to MIFIDPRU

On 2 June 2023, the FCA proposed the following amendments to MIFIDPRU in its Quarterly Consultation:

• new guidance will be provided to clarify that where a MIFIDPRU investment firm is subject to other FCA prudential requirements, the Own Funds Threshold Requirement under the IFPR cannot be lower than the total resources requirement under any other prudential regime that applies to that firm;
• the "Assessment B" component of the Liquid Assets Threshold Requirement diagram in MIFIDPRU 7.7.5 only requires the additional amount of liquid assets for orderly wind-down (over and above the basic liquid assets requirement);
• new detailed guidance on when an investment firm group should operate an ICARA process on a consolidated basis;
• additional guidance on the requirements that must still be met on an individual basis to comply with the group ICARA conditions in MIFIDPRU 7.9.5; and
• the MIF007 form in the FCA Handbook will be aligned with RegData to correct inconsistencies.

Financial Crime

5. FCA: Press release: FCA fines ED&F Man Capital Markets Ltd £17.2 million for oversight failures regarding cum-ex trading and enabling illegitimate tax reclaims

On 5 June 2023, the FCA published a press release confirming that it has fined ED&F Man Capital Markets Ltd (MCML) £17,219,300 for serious failings in its oversight of cum-ex trading. This related to MCML collecting fees for trading strategies designed to enable its clients to illegitimately reclaim tax from Danish authorities.

The FCA stated that between February 2012 and March 2015, £20 million of withholding tax (WHT) reclaims made by MCML's clients to the Danish tax authority were illegitimate, and MCML consequently generated £5.06 million in additional fees as a result.

The FCA found the following key failings in respect of MCML's oversight capability:

• MCML had inadequate compliance checks and failed to ensure that dividend arbitrage trading was legitimate;
• MCML's compliance function did not have the necessary expertise to monitor or review the trading, and only carried out a high-level annual compliance review of the department responsible; and
• MCML failed to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading.

This is the latest FCA action in connection with cum-ex dividend arbitrage cases and WHT schemes.

6. FCA: Speech by Therese Chambers: 'Do The Right Thing'

On 1 June 2023, the FCA published an inaugural speech by Therese Chambers in her role as Joint Executive Director of Enforcement and Market Oversight, entitled 'Do the Right Thing'. The speech sets out the FCA's future enforcement strategy and priorities. Ms. Chambers explains that 'doing the right thing' involves firms taking responsibility for the harm they have caused to their customers, by proactively working with the FCA to address wrongdoing.

The FCA is focused on early detection, transparency and cooperation when tackling financial crime, fraud and consumer harm. To achieve this, the FCA is investing in data and technology to better detect financial crime, and emphasised that transparency and cooperation by firms with the FCA will be rewarded.

The FCA's enforcement vision will be further set out when Steve Smart, Ms. Chambers' fellow Co-Executive Director of Enforcement, joins the FCA on 21 June. Ms. Chambers states that firms should expect a strong alignment between the FCA's enforcement work and the FCA's objectives, in which the Consumer Duty plays a fundamental role.

7. CMA: Press release: CMA provisionally finds five banks broke competition law on UK bonds

On 24 May 2023, the Competition and Markets Authority (CMA) published a press release that it has provisionally found that Citi, Deutsche Bank, HSBC, Morgan Stanley and Royal Bank of Canada (the Banks) unlawfully exchanged competitively sensitive information on UK government bonds between 2009 and 2013.

The Banks shared information on pricing and other aspects of their trading strategies on UK bonds in one-to-one chat rooms. The CMA found that by exchanging the information, the Banks could have denied the full benefits of competition to pension funds, the UK Debt Management Office and ultimately UK taxpayers.

If the CMA reaches a final conclusion that any two or more of the Banks engaged in anti-competitive activity, the CMA will publish an infringement decision and issue fines.

Retail Services

8. FCA: Quarterly Consultation No. 40: Amendments to the ban on offering incentives to invest in high-risk investments

On 2 June 2023, the FCA issued further clarity in its Quarterly Consultation in relation to its proposed inducements ban on incentives to invest in high risk investments.

The the ban applies to any incentives offered to retail clients as part of a financial promotion relating to high-risk investments, even when there is no requirement to invest to gain the benefit. The ban is designed to apply regardless of the rationale for offering the incentive.

As the intention is not to prevent a competitive environment, an additional exemption to the ban will be introduced which permits incentives offered for the sole purpose of encouraging clients to switch platforms (inducements which are aimed at inducing a platform transfer, but where there is no attempt to encourage clients to increase the total levels of their holdings or the underlying products they hold).

The FCA provided further guidance on what factors characterise incentives falling within the ban, including the following:

• a benefit which is entirely separable from the investment or investment activity that is the subject of the financial promotion is likely to be an incentive (whereas a benefit intrinsically linked with the investment, such as voting rights inherently connected with a share, are unlikely to be an incentive);
• discounts and rebates for investing, or for investing a particular amount, may amount to monetary or non-monetary incentives within the scope of the ban;
• benefits which are conditional on other factors, such as only being available for a fixed period of time or those which are contingent upon investing, would likely be viewed as incentives within scope of the ban; and
• benefits that are only available through a particular channel are likely to constitute an incentive within scope of the ban, for example a benefit offered only to retail clients who invest via social media.

The FCA confirms that lower fees available to all clients and not linked to the volume of trades does not constitute a monetary incentive (the price of the offering is not considered an incentive).

As the FCA views these as clarifications to the existing rules, the new rules will apply with immediate effect once the final Handbook changes are made and published, expected to be at some point within Q3 2023.

9. FCA: Policy Statement (PS23/5): Final Rules on debt packagers receiving referral fees

On 2 June 2023, the FCA published Policy Statement (PS23/5) summarising the feedback received to the FCA's previous consultation proposals to ban referral fees, and other forms of commission or remuneration, paid by debt solution providers to debt packagers, and the FCA's response containing new rules banning debt packagers from receiving referral fees.

There was overall support for the proposal to ban debt packagers from receiving referral fees. The FCA considers the ban should be implemented quickly, given the high risk of harm to consumers and the current cost-of-living challenges.

The final rules introducing the ban include the following:

• where CONC 8.3.11 applies, existing debt packager firms must ensure they do not receive any commission, fee or any other financial consideration from a debt solution provider for any referral or related service conducted after 2 October 2023;
• where an Appointed Representative would be within scope of the ban if they were an Authorised Person, their Principal firm must take all reasonable steps to ensure the Appointed Representatives complies with the ban by 2 October 2023; and
• firms who start, or restart, carrying out debt packager business from 2 June 2023 will be subject to the ban and will not benefit from the implementation period.

The scope of the ban will not capture 'not-for-profit' debt advice firms or apply to regulated providers of debt solutions with different business models to debt packagers.

10. FCA: Consultation Paper (CP23/13): Strengthening Protections for Borrowers in Financial Difficulty

On 25 May 2023, the FCA published Consultation Paper (CP23/13) Strengthening Protections for Borrowers in Financial Difficulty: Consumer Credit and Mortgages. The proposed rules incorporate aspects of the FCA's Tailored Support Guidance (TSG) into CONC and MCOBS. The Consultation also proposes additional targeted changes to support customers in financial difficulty.

The overarching aim of the proposals is to create a stronger framework for firms to better support customers in financial difficulty, focused on early engagement to mitigate consumer harm. The proposals build on, and enhance, the FCA's expectations of firms to deliver good outcomes for customers in financial difficulty required under the Consumer Duty.

The key points for relevant firms are:

• to provide appropriate support to customers at risk of payment difficulty (for example, before they have missed a payment);
• a proposal for enhanced guidance around forbearance options and the suitability of arrangements;
• a proposal for firms to be required to better signpost and communicate debt advice and guidance to customers; and
• proposed new guidance for firms on determining their necessary and reasonable costs in setting fees and charges.

The FCA is seeking feedback on its proposals by 13 July 2023. The FCA intends to publish a final rules in the second half of 2023, which are expected to come into force during the first half of 2024 (the TSG will be withdrawn simultaneously at that time).

11. European Commission: Press release: Capital Markets Union: Commission proposes new rules to protect and empower retail investors in the EU

On 24 May 2023, the European Commission published proposed new rules to protect and empower retail investors in the EU, known as the Retail Investment Package, consisting of two legislative proposals:

• a Regulation to amend the EU PRIIPs Regulation with regard to the modernisation of KIDs; and
• a Directive to amend the UCITS Directive, Solvency II, AIFMD, MiFID II, and the Insurance Distribution Directive in relation to EU retail investor protection rules.

The European Parliament and the EU Council will now review the proposals.

For more information, please see our briefing here.

12. EBA: Consultation Paper (CP/23/11): Guidelines on amending the Money Laundering and Terrorist Financing Risk Factors Guidelines

On 31 May 2023, the EBA published a consultation on the intended amendments to its Guidelines on money laundering and terrorist financing risk factors. The proposed changes aim to extend the scope of the Guidelines to encompass cryptoasset service providers (CASPs).

The amended Guidelines will impose regulatory expectations on CASPs to identify and mitigate AML/CTF risks by:

• introducing sector specific guidance for CASPs that that assist in identifying exposure to high-risk factors;
• guidance on how CASPs should adjust customer due diligence in line with these risks; and
• guidance specific to the AML/CFT supervisors of CASPs, that will be delivered through amendments to the EBA Risk-Based Supervision Guidelines.

The deadline for responses to the Consultation is 31 August 2023.

Payments

13. PSR: Policy Statement (PS23/3): Fighting Authorised Push Payment Fraud

On 7 June 2023, the PSR published Policy Statement (PS23/3) detailing new requirements for banks and Payment Service Providers (PSPs) in addressing authorised push payment (APP) fraud.

The new requirements are intended to ensure that a higher number of victims of APP fraud can be refunded for their loss, and the PSR intends that the increase ease for victims to recover lost funds will prompt more preventative action from PSPs, who are required to settle claims regarding APP fraud.

Key aspects of the new requirements include:

• which customers are within scope of the reimbursement requirement;
• how the cost of reimbursement will be shared between sending and receiving PSPs;
• exceptions to the reimbursement requirement;
• additional protections for vulnerable customers;
• no minimum amount for claims for APP fraud, but a maximum amount upon which the PSR will consult; and
• time limits for victims of APP fraud to make a claim for reimbursement.

The updated policies will provide the industry guidance, including how to apply a claim excess and maximum level of reimbursement. The reimbursement requirement is scheduled to come into force in 2024.

Digital Services and Fintech

14. European Parliament: MiCA Published in Official Journal

On 9 June 2023, the European Parliament published Regulation (EU) 2023/1114 on markets in crypto-assets (MiCA) and published Regulation (EU) 2023/1113 on information accompanying transfer of funds and certain crypto-assets.

More details are available in our Digital Assets Digest available here and our briefing on MiCA available here.

15. FCA: Policy Statement (PS 23/6): Financial promotion rules for cryptoassets

On 8 June 2023, the FCA published Policy Statement (PS23/6) on financial promotion rules for cryptoassets, summarising feedback received by the FCA to its earlier consultation, and setting out the final policy position and near final Handbook rules.

The FCA will proceed with categorising cryptoassets as Restricted Mass Market Investments and applying the associated restrictions on how they can be marketed to UK consumers. This will make it more difficult, but not impossible, for firms to mass-market cryptoassets in the UK.

The FCA will take robust action against firms for breaching the relevant rules once they are in effect. Such action may include requesting removal of websites that are in breach, placing restrictions on firms to prevent harmful promotions, and enforcement action.

The rules apply from 7 and 8 October 2023, following a four-month transition period. The FCA has published a consultation on non-handbook guidance(GC23/1), to which responses can be provided by 10 August 2023.

For further detail on the new rules, including the ten things you need to know, please see our briefing here.

16. ESMA: Updated Q&As: DLT Pilot Regime

On 2 June 2023, ESMA updated its Q&As in connection with the implementation of Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (DLT), which included new Q&As in relation to the following:

• whether the issuing of DLT financial instruments through certain differing modalities and partial tokenisation are permitted under the DLT pilot;
• the admissibility of UCITS, ETFs, other collective investment undertakings represented by shares, and securities financing transactions under the DLT pilot;
• whether DLT MTFs are permitted to organise off-chain trading in relation to DLT financial instruments;
• applications for a permission to operate a DLT trading and settlement system;
• the interpretation of e-money tokens under the DLT pilot and MiCA; and
• internalised settlement reporting and the book-entry form obligation under the CSDR.

ESG

17. ESAs: Press release: ESAs put forward common understanding of greenwashing and warn on risks

On 1 June 2023, ESMA, the EBA and EIOPA each published a progress report on greenwashing in the financial services sector. The reports have been prepared in response to the Commission's May 2022 Request for Input from the ESAs related to greenwashing risks and supervision of sustainable finance policies.

In the reports, the ESAs put forward a common high-level understanding of greenwashing, being a practice where sustainability-related statements, declarations, actions, or communications do not clearly and fairly reflect the underlying sustainability profile of an entity, a financial product or financial service, which may be misleading to consumers, investors, or other market participants.

Key points from the ESAs' progress reports are:

• there is a mismatch between a growing investor demand for "ESG products" and investment products that are genuinely sustainable;
• the EU's current legislative framework is not holistic, and the legislation is not 'joined-up';
• there is a lack of supervisory oversight of, and enforcement against, entities suspected of greenwashing;
• market education is needed throughout all parts of the market, to ensure market participants are sufficiently well informed about the risk of greenwashing and applicable regulation;
• the most common forms of greenwashing are highlighting positive aspects of an entity or product while failing to mention less ESG-friendly aspects ('cherry-picking'), omitting key information, making ambiguous, empty or exaggerated ESG-related claims, and using ESG terminology in a misleading manner;
• Articles 6, 8 and 9 of SFDR are frequently erroneously used as labelling conventions, rather than as indicators of the required level of disclosure;
• regulatory documents such as prospectuses are generally less prone to greenwashing than marketing materials, labels and voluntary reporting; and
• greenwashing can occur at all stages of product development and across all sectors.

The ESAs are expected to publish their final reports and recommendations in 2024, which are likely to include recommended changes to the EU regulatory framework including the EU Benchmarks Regulation, the SFDR and the Taxonomy Regulation.

Other

18. FCA: New webpage: Financial information for authorisations

On 25 May 2023, the FCA updated its webpage on authorisation applications. This includes a new webpage on "preparing your firm's financial information", which any applicant should consider as part of an FCA authorisation application.