Financial Services SpeedRead: 12 May 2021
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 THIS EDITION OF THE FINANCIAL SERVICES SPEEDREAD WE COVER THE FOLLOWING 19 UPDATES: |
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Brexit 1. Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021 made 2. HM Treasury issues guidance on open access regime for exchange-traded derivatives 3. Financial Services Act 2021 makes changes to the UK financial regulatory framework in light of Brexit |
Financial Markets 4. ESMA publishes guidelines on outsourcing to cloud service providers 5. Financial Services Regulatory Initiatives Forum publishes third edition of the Regulatory Initiatives Grid 6. EU Commission publishes draft Delegated Regulation which specifies the content and presentation of information to be disclosed under Article 8 of the Taxonomy Regulation by undertakings subject to the Non-Financial Reporting Directive 7. "Regulation for a different world?" – speech by Nikhil Rathi, CEO of the FCA 8. "Outcomes-focused regulation: a measure of success?" – speech by Charles Randell, Chair of the FCA 9. FCA publishes consultation paper on investor protection measures for SPACs 10. Financial Action Task Force updates table on assessment ratings 11. FCA publishes consultation paper on strengthening financial promotion rules for high-risk investments and firms approving financial promotions 12. FCA publishes consultation paper on changes to UK MiFID's conduct and organisational requirements |
Banking and Prudential 13. Letter from PRA to Chief Risk Officers of PRA-regulated UK deposit takers 14. PRA publishes discussion paper on prudential framework for non-systemic banks and building societies post-Brexit 15. "Building strong and simple: the first step" – speech by Victoria Saporta, Bank of England Executive Director for Prudential Policy |
Fund Management 16. FCA publishes consultation paper on a new long-term asset fund to support investment in long-term, illiquid assets |
Financial Crime 17. FCA fines Sapien Capital Ltd for serious financial crime control failings in relation to cum/ex trading |
FinTech 18. FCA publishes evaluation report on the Digital Sandbox Pilot |
Other 19. EU Commission fines investment banks €28 million for participating in SSA bond trading cartel |
Brexit |
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1. Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021 madeOn 10 May 2021, the Capital Requirements Regulation (Amendment) (EU Exit) Regulations 2021 (SI 2021/558) were published, together with an explanatory memorandum. Under Articles 493 and 498 of the UK and the EU Capital Requirements Regulation (575/2013) (CRR), commodity dealers are exempted from specific prudential requirements. These exemptions were to expire after 26 June 2021 – the date on which the Investment Firms Regulation ((EU) 2019/2033) applies in the EU. SI 2021/558 extends this exemption to 1 January 2022 – the date on which the date on which the UK Investment Firms Prudential Regime (IFPR) will come into effect. 2. HM Treasury issues guidance on open access regime for exchange-traded derivativesOn 30 December 2020, HM Treasury issued guidance, announcing that it would conduct a review of the open access regime for exchange traded derivatives (ETDs) to assess its suitability for UK markets after the end of the Brexit transition period. Following this review, HM Treasury has concluded that the open access regime for ETDs, which was originally designed to improve cross-border capital markets in the EU, is not suitable in a UK-only context. The UK Government therefore intends to permanently remove the open access regime for ETDs when parliamentary time allows. This decision has no bearing on the UK's continued support for the open access regimes in equity and OTC derivatives markets, which will continue to operate as normal. 3. Financial Services Act 2021 makes changes to the UK financial regulatory framework in light of BrexitOn 29 April 2021, the Financial Services Bill 2019-21 received royal assent. The Financial Services Act 2021 makes changes to the UK financial regulatory framework in light of Brexit. The key aspects include:
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Financial Markets |
4. ESMA publishes guidelines on outsourcing to cloud service providersOn 10 May 2021, ESMA published guidelines on outsourcing to cloud service providers (CSPs). These guidelines aim to help firms and competent authorities identify, address and monitor the risks and challenges arising from cloud outsourcing arrangements. The guidelines provide guidance for firms on:
The guidelines apply from 31 July 2021 to all cloud outsourcing arrangements entered into, renewed or amended on or after that date. ESMA states that firms should review and amend accordingly existing cloud outsourcing arrangements with a view to ensuring that they take into account the guidelines by 31 December 2022. Where the review of cloud outsourcing arrangements of critical or important functions is not finalised by 31 December 2022, firms should inform their competent authority, including the measures they plan to take to complete the review or their possible exit strategy. 5. Financial Services Regulatory Initiatives Forum publishes third edition of the Regulatory Initiatives GridOn 7 May 2021, the Financial Services Regulatory Initiatives Forum (Forum) published the third edition of the Regulatory Initiatives Grid (Grid). The Forum is comprised of various key stakeholders, including the FCA, the Bank of England and the Payment Systems Regulator, with HM Treasury attending as an observer member. The Grid summarises some of the key forthcoming initiatives across various areas including "multi-sector" initiatives (e.g. ESG, operational resilience, conduct), banking credit and lending, and investment management. The latest edition of the Grid contains 128 initiatives, an increase on the 111 initiatives included in the previous edition in September 2020. This, in part, reflects that a number of new initiatives have been added where regulators are pushing forward in areas which are a shared priority (e.g. eight new ESG initiatives). The Grid publication marks the end of a one-year pilot exercise. The Forum plans to keep publishing the Grid twice a year. 6. EU Commission publishes draft Delegated Regulation which specifies the content and presentation of information to be disclosed under Article 8 of the Taxonomy Regulation by undertakings subject to the Non-Financial Reporting DirectiveUnder Article 8 of the Taxonomy Regulation ((EU) 2020/852), financial market participants covered by Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) and companies covered by the Non-Financial Reporting Directive (2014/95/EU) (NFRD) are both required to disclose, amongst others, the extent to which their products or activities are environmentally sustainable (as defined under the Taxonomy Regulations). On 7 May 2021, the EU Commission published a draft Delegated Regulation which specifies the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of the NFRD and the methodology to comply with that disclosure obligation. 7. "Regulation for a different world?" – speech by Nikhil Rathi, CEO of the FCAOn 6 May 2021, Nikhil Rathi, CEO of the FCA, gave a speech to the Association of Foreign Banks on the UK regulatory landscape post-Brexit. We summarise the main points of his speech below.
8. "Outcomes-focused regulation: a measure of success?" – speech by Charles Randell, Chair of the FCAOn 6 May 2021, Charles Randell, Chair of the FCA, gave a speech to the Building Societies Association on the future of outcome-focused regulation. We summarise the main points of his speech below.
9. FCA publishes consultation paper on investor protection measures for SPACsOn 30 April 2021, the FCA published a consultation paper (DP21/10) on proposed changes to its Listing Rules for certain special purpose acquisition companies (SPACs). The FCA proposes amending the rules to allow an alternative approach for listed SPACs that are able to demonstrate higher levels of investor protection which have developed in certain overseas jurisdictions. Currently, a SPAC will have to suspend trading in its shares at the point it identifies announces an acquisition target. Suspension seeks to preserve market integrity during a period when limited information on a prospective deal could result in disorderly trading in a SPAC's shares. However, suspension results in existing investors being locked into a SPAC until completion, which could be many months and therefore undesirable for investors and issuers. The FCA is proposing that SPACs that comply with higher levels of investor protection should not be subject to this requirement. 10. Financial Action Task Force updates table on assessment ratingsOn 29 April 2021, the Financial Action Task Force (FATF) updated its consolidated table of AML risk assessment ratings. The table includes the FATF categorisation of countries on the FATF high-risk list. The updated list shows some discrepancies between the UK anti-money laundering (AML) high-risk list and FATF list. The breakdown is as follows:
11. FCA publishes consultation paper on strengthening financial promotion rules for high-risk investments and firms approving financial promotionsOn 29 April 2021, the FCA published a discussion paper (DP21/1) proposing a number changes to the FCA's approach to financial promotions and product governance for retail clients in response to increasing concerns about gamification trading among new and inexperienced traders. In summary, the FCA classifies high-risk investments as any investment which is subject to marketing restrictions under the FCA rules, including non‑readily realisable securities (NRRSs), peer‑to‑peer (P2P) agreements, non‑mainstream pooled investments (NMPIs) and speculative illiquid securities (SISs). The FCA is seeking feedback on a number of points, including the following:
DP21/1 follows the FCA's Call for Input on the Consumer Investment Market which closed on 15 December 2020. A key theme in responses the FCA received to the Call for Input was the need to further segment high‑risk investments from the mainstream market, and to help prevent consumers from investing in inappropriate investments that do not meet their needs. 12. FCA publishes consultation paper on changes to UK MiFID's conduct and organisational requirementsOn 28 April 2021, the FCA published its consultation paper (CP21/19) on proposed changes to UK MiFID's conduct and organisational requirements. The FCA proposes:
- for research on listed or unlisted SMEs companies who have a market capitalisation below £200m. The £200m threshold would be assessed for the 36 calendar months preceding the provision of the research, provided it is offered on a rebundled basis or for free; - for research received in connection with investment strategies that relate primarily to fixed income, currencies and commodities instruments; - for research provided by independent research providers where this does not involve execution; - for openly available research; and
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Banking and Prudential |
13. Letter from PRA to Chief Risk Officers of PRA-regulated UK deposit takersOn 30 April 2021, Melanie Beaman, Director of the PRA's Deposit Supervision, sent a letter to Chief Risk Officers of PRA-regulated UK deposit takers. The letter states that the PRA is assured from its internal audit findings of 42 non-systematic banks and building societies that the processes and controls in place for collection operations are largely adequate and effective across the majority of the firms. However, the letter also highlights that some firms need to continue to enhance their collections operation, develop the right level of control and governance to ensure its effectiveness, review the adequacy of resources, efficiently manage the processes and ensure adequate oversight at Board level. 14. PRA publishes discussion paper on prudential framework for non-systemic banks and building societies post-BrexitOn 29 April 2021, the PRA published a discussion paper (DP 1/21) on the options for developing a simpler prudential framework for banks and building societies that are considered by the PRA to be neither systemically important nor internationally active. The paper outlines reasons as to why the prudential framework at present may be viewed as overly complex for smaller firms (and how this relates to the PRA's wider objectives). It seeks to outline a vision for potential reform to the prudential framework in the UK, which could be changed in order to reduce potential complexity for such firms, whilst maintaining overall resilience in the sector. In particular, Chapter 7 of the discussion paper sets out various conclusions, which can be summarised as follows:
15. "Building strong and simple: the first step" – speech by Victoria Saporta, Bank of England Executive Director for Prudential PolicyOn 29 April 2021, Victoria Saporta, Bank of England Executive Director for Prudential Policy gave a speech, following on from her previous 2020 speech, concerning the PRA's approach to regulating banking and insurance services post-Brexit. We summarise the main points of her speech below:
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Fund Management |
16. FCA publishes consultation paper on a new long-term asset fund to support investment in long-term, illiquid assetsOn 7 May 2021, the FCA published a consultation paper (CP 21/12) on proposals for a new long-term asset fund (LTAF) designed to invest in long-term, illiquid assets. The LTAF would be open-ended and able to invest in assets such as venture capital, private equity, private debt, real estate and infrastructure. The FCA proposes that LTAF rules embed longer redemption periods, high levels of disclosure and specific liquidity management and governance features. These would take account of the types of risk to which LTAFs might be exposed, and give investors confidence that they are being managed appropriately and in their interests. Relatedly, the Bank of England published a statement on the progress of its Working Group on Productive Finance. The Working Group met this week to discuss progress on:
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Senior Managers and Governance |
No updates for this fortnight's edition of the FSS. |
Financial Crime |
17. FCA fines Sapien Capital Ltd for serious financial crime control failings in relation to cum/ex tradingOn 6 May 2021, the FCA fined Sapien Capital Ltd (Sapien) £178,000 for failings which led to the risk of facilitating fraudulent trading and money laundering. This is the first FCA case in relation to cum/ex trading, dividend arbitrage and withholding tax reclaim schemes. There are currently a number of ongoing and overlapping investigations. The FCA found that between 10 February 2015 and 10 November 2015, Sapien failed to have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group. The way these trades were conducted by the Solo Group and their clients, in combination with their scale and volume, were, in the FCA's view, highly suggestive of financial crime and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium. Sapien executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities. In addition, in the FCA's view, Sapien failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and in failing properly to assess, monitor and mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading. |
Retail Investments |
No updates for this fortnight's edition of the FSS. |
Payments |
No updates for this fortnight's edition of the FSS. |
Fintech |
18. FCA publishes evaluation report on the Digital Sandbox PilotOn 27 April, the FCA published its evaluation report on the Digital Sandbox Pilot (Pilot). The Pilot stems from a recent collaboration with The City of London Corporation to provide support to innovative firms tackling challenges caused by the COVID-19 pandemic and focused on three pressing areas: fraud and scams, vulnerability and SME lending. The FCA found that access to a digital testing environment successfully accelerated development times for the vast majority of participants as well as providing other benefits, such as improving product design and refining early-stage business models. The FCA announced that it was planning to launch a second phase of the Pilot focused on sustainable finance. The FCA noted that it would explore, with industry and other stakeholders, viable sustainable operating models for a future permanent version of the Pilot. The Pilot was also an opportunity to collect user feedback to inform and shape future iterations. As set out in the report, the FCA have distilled a range of stakeholder feedback into actionable lessons learned and clarified that it will be incorporating these into the next phase of the Pilot. |
Others |
19. EU Commission fines investment banks €28 million for participating in SSA bond trading cartelOn 28 April 2021, the EU Commission fined Bank of America Merrill Lynch, Crédit Agricole and Credit Suisse a total of €28,494,000 for breaching EU antitrust rules. Deutsche Bank was not fined, as it revealed the existence of the cartel to the Commission. The four investment banks participated in a cartel in the secondary trading market of Supra-sovereign, Sovereign and Agency (SSA) bonds denominated in USDs through a core group of traders. The traders provided each other with recurring updates on their trading activities, exchanged commercially sensitive information, coordinated on prices shown to their customers or to the market in general, and aligned their trading activities. This conduct took place during a five-year period and affected the trading of USD denominated SSA bonds on the secondary market in the EEA. In setting the level of fines, the Commission took into account the sales value in the EEA achieved by the cartel participants for the products in question, the serious nature of the infringement, its geographic scope and the respective duration of participation. |
Authors: Emma Tran & Vidhi Mahajan
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