Financial Services SpeedRead 24 November 2021

1. FCA publishing statement confirming the revised FX Global Code and the Global Precious Metals Code

On 19 November 2021, the FCA added FX Global Code and Global Precious Metal Codes to its list of recognised industry codes. The recognised industry codes are those that receive 'FCA recognition' despite being unregulated activities.

The FCA also reiterated that individuals subject to the SM&CR need to meet requirements for market conduct, for both regulated and unregulated activities. Behaviour that is in line with an industry code will usually indicate that the individual is complying with such obligations.

2. ESMA publishes final report on clearing and derivative trading obligations under EMIR and MiFIR following benchmark transition

On 18 November 2021, in light of the upcoming discontinuation of EONIA and LIBOR, ESMA issued a final report outlining the proposed draft Regulatory Technical Standards (RTS) to amend the scope of the EU derivatives clearing obligation and the EU derivatives trading obligation (EU DTO). The amendments aim to ensure a "smooth benchmark transition" as well as effectively maintaining the scope of the CO and EU DTO.

The proposed amendments would:

• as of 3 January 2022, remove derivatives referencing EONIA, GBP LIBOR and JPY LIBOR from the EU derivatives clearing obligation;
• as of 3 January 2022, introduce derivatives referencing €STR to the EU derivatives clearing obligation;
• as of 3 January 2022, remove derivatives referencing GBP LIBOR and USD LIBOR from the EU DTO; and
• three months after the publication of the RTS in the Official Journal, introduce derivatives referencing SOFR to the EU derivatives clearing obligation.

ESMA has submitted the draft RTS to the European Commission for endorsement. Adoption of these amendments may take time so the report suggests the new provisions come into force as soon as possible in advance of the benchmark transition.

3. EBA publishes final report on guidelines on sound remuneration policies and final report on guidelines on internal governance

On 22 November 2021, the EBA published a final report on its revised guidelines on sound remuneration policies for investment firms under Articles 30(4) and 32 (9) of the Investment Firms Directive ((EU) 2019/2034) (IFD), as well as a final report on internal governance under Article 26(4) of the IFD. Both final reports relate to class 2 investment firms.

In summary:

• Final Report on Guidelines on Sound Remuneration Policies: The guidelines are mostly consistent with the existing guidelines under the CRD IV Directive (2013/36/EU) however there is an absence of a bonus cap as well as differences in instruments and the length of deferral periods. In addition, the guidelines make clear that remuneration policies must be gender-neutral and comply with the equal pay for equal work principal.
• Final Report on Internal Governance: The guideline specifies the tasks, responsibilities and organisation of the management body, and the organisation of investment firms, including the requirement for transparent structures that allow for supervision of all their activities. The guidelines also require investment firms to have measures in place to ensure sound management of risks across all three lines of defence, with detailed requirements for the second line of defence (the compliance function and the independent risk management where applicable) and, the third line of defence (the internal audit function).

Both guidelines will enter into force on 30 April 2022.

4. FCA publishes new IFPR application forms

On 19 November 2021, the FCA published the following MIFIDPRU forms for the purposes of the Investment Firms Prudential Regime:

• Application under MIFIDPRU 2.3.1R to be exempt from disclosure requirements in MIFIDPRU 8 (Disclosure by investment firms) for SNI firms in consolidated insurance groups;
• Application under MIFIDPRU 3.3.2R for permission to include interim or year-end profits as common equity tier 1(CET1) capital before the firm has taken a formal decision confirming the final profit and loss for the year;
• Application under MIFIDPRU 3.6.2R for permission to reduce own funds instruments where neither condition in MIFIDPRU 3.6.3R applies;
• Application under MIFIDPRU 4.5.9R for permission to rebase fixed overhead requirement;
• Application under MIFIDPRU 4.11.9R;
• Application for a permission under MIFIDPRU for which there is no dedicated application form;
• Application under MIFIDPRU 4.12.6R;
• Application under MIFIDPRU 4.12.4R for permission to use an advanced internal market risk model; and
• Application under MIFIDPRU 4.12.66R.

5. FCA summarise amendments to Investment Firms Prudential Regime Instrument 2021

On 12 November 2021, the FCA published a table summarising the amendments to the original text of the near-final Investment Firms Prudential Regime ("IFPR") Instrument. No amendments have been made to the substantive content of the IFPR Instrument since the near-final version was issued in the FCA's July 2021 policy statement (PS 21/9) in July 2021.

The amendments relate to:

• The glossary definition of 'UK parent investment firm' – to ensure "connected undertaking" relationships function as intended under MIFIDPRU 2.4 and 2.5;
• MIFIDPRU 4.14.1R(2)(b) and 4.14.2G – to ensure the K-TCD requirement also includes any SFTs and long settlement transactions entered into by a firm with permission to deal on own account;
• MIFIDPRU 7.9.5R(5) – to correct the reference to the notification requirement under 7.6.13R;
• MIFIDPRU 9 Annex 2G (Guidance notes on data items in MIFIDPRU 9 Annex 1R): MIF002 guidance notes – to correct references to items 7A to 9A;
• MIFIDPRU 9 Annex 2G (Guidance notes on data items in MIFIDPRU 9 Annex 1R): MIF007 guidance notes – to correct references to 69A (where 68A has been completed) and references to 71A (where 70A has been completed);
• MIFIDPRU TP10.2R(4)(a) and MIFIDPRU TP 10.9G – to ensure the transitional requirement in MIFIDPRU TP10 on individual capital guidance includes any amounts regarding capital planning buffers or other CRD IV buffers under IFPRU 10;
• SUP 16.12.17R – to delete the MLA-M row for reporting frequency rules; and
• Application and notification forms – to outline operational and administrative requirements and to ensure the information the FCA requires is clearer to firms.

The FCA noted that further amendments may be made to small number of the final rules when it responds to CP21/26.

No updates for this fortnight's edition of the FSS.

6. FRC and FCA write to CEOs on mandatory structured reporting obligations

On 15 November 2021, the FRC and FCA issued a joint letter to the CEOs of issuers in scope of rule 4.1 of the Disclosure Guidance and Transparency Rules. The letter reminds those relevant entities of their obligations to produce their annual financial reports in a structured XHTML web browser format and to file them with the FCA's National Storage Mechanism.

The FCA had previously delayed the effective date of the requirements in response to the COVID-19 pandemic, but this letter reminds CEOs that the new rules will change from voluntary to mandatory from 1 January 2022 (for financial years starting on/after 1 January 2021).

The letter also sets out the FRC and FCA's expectations on quality in relation to these requirements and recommends that CEOs consider the FRC's Lab review which outlines the key areas that issuers may want to address. The FRC and FCA will review the quality and usability of the new requirements during 2022 and plan to publish a follow-up to the FRC's Lab review later in 2022.

Further information on the new UK structured reporting requirements can be found here.

7. FCA issues Final Notice to Servicesport Finance Limited refusing SMF 29 application

On 10 November 2021, the FCA published a final notice to Servicesport Finance Limited (SFL), in which it refused the application for Mr Jonathan Peter Mounteney's to perform a SMF29 Limited Scope function.

The FCA was not satisfied that the individual was a "fit and proper person" to carry out the SMF29 function as he failed to meet the requirements of FIT 2.1 (Honesty, integrity and reputation) and FIT 2.2 (Competence and capability) for the following reasons:

• the individual failed to disclose relevant disciplinary matters, including continually failing to disclose serious allegations by the Solicitors Regulation Authority in previous SMF applications;
• the individual was not helpful or appropriate when communicating with the FCA;
• it was not intended for the individual to dedicate adequate time to perform the SMF29 function; and
• the individual is not currently employed by SFL and does not have a management or supervisory role.

8. HM Treasury Report: Anti-money laundering and counterterrorist financing: Supervision Report 2019-20

On 19 November 2021, HM Treasury published its "Anti-money laundering and counter-terrorist financing: Supervision Report 2019-20" (Report).

The Report summarises the performance of AML/CTF supervisors between 6 April 2019 – 5 April 2020 and includes supervisory and enforcement data on both the statutory and Professional Body Supervisors (PBSs).

The key findings are:

• PBSs conducted a total of 2,235 desk-based reviews (DBRs) and 1,980 onsite visits during the reporting period, meaning that approximately 10 per cent of the supervised population were subject to a DBR or an onsite visit;
• there has been a general rise in the enforcement activity of PBSs in the form of fines; and
• PBSs reported that the most frequent breaches were: having no, or inadequate documented policies and procedures; inadequate CDD procedures including EDD/ Politically Exposed Persons; no, or inadequate, client risk assessment; and no, or inadequate, AML training for staff; and no, or inadequate, firm-wide risk assessments.

9. FCA publish Market Watch 68

On 16 November 2021, the FCA published "Market Watch 68" which focussed on web-based trading platforms.

The FCA has observed an increase in the use of electronic trading platforms in recent times and have therefore focussed on the following risks and challenges associated with the increase:

• Market abuse surveillance: the FCA is concerned that users of web-based platforms may not be able to monitor all of their orders to detect market abuse in line with their obligations under Article 16(2) of UK MAR. This is because users do not always systematically record order messages that precede execution;
• Data challenges: many users of web-based platforms are unable to get data in a suitable format for surveillance;
• Compliance awareness: compliance teams of users of web-based platforms do not all have a strong hold over their firm's use of web-based platforms and surveillance gaps;
• MAR assessments: many firms' MAR assessments do not include business entered on web-based platforms and therefore question whether proper surveillance is in place;
• Record keeping: due to gaps in capturing all trades, firms are unlikely to comply with the requirement to keep data relating to all orders and transactions for a period of five years;
• Onboarding governance: firms should make greater effort to consider market abuse surveillance and record keeping obligations when onboarding new platforms;
• Firm rationales for failings: firms continue to use "questionable rationales to justify their potential failure to meet their obligations under UK MAR" and the FCA will not accept this as a reason for a firms' failure to comply with UK MAR; and
• Operators of web-based platforms: the FCA reminds operators of their obligations to effectively monitor and prevent potential market abuse.

10. CFATF publish report on Cayman Islands' progress in strengthening AML measures

On 16 November 2021, the Caribbean Financial Action Task Force ("CFATF") published a report outlining the Cayman Islands' progress in strengthening measures to tackle money laundering and terrorist financing was released.

The report analyses the progress that has been made against the deficiencies that were highlighted in the CFATF's March 2019 report with focus on Recommendation 15 (New technologies).

The report notes that the Cayman Islands have addressed most of the requirements that were highlighted to them previously and it is now largely compliant with Recommendation 15. As a result, the Cayman Islands does not have any outstanding recommendations marked as non-compliant.

Despite this progress, the Cayman Islands will remain part of the enhanced follow-up process with the CFATF on the basis that it has low levels of effectiveness for seven or mor of the eleven effectiveness outcomes. This means that it will continue to report to the CFATF on progress made to strengthen its AML and terrorist financing measures.

11. FCA fine Sunrise Brokers LLP for financial crime control failings

On 12 November 2021, the FCA published its final notice against Sunrise Brokers LLP fining it £642,000 for serious financial crime control failings in relation to cum-ex trading.

This is the second fine issued by the FCA in relation to cum-ex trading. The first was issued in May 2021 against Sapien Capital Ltd (for more information, see our briefing here).

The FCA found that Sunrise had breached Principle 2 ("a firm must conduct its business with due skill, care and diligence") and Principle 3 ("a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems") for its failure to prevent fraudulent trading undertaken by the Solo Group. The trading that was undertaken by the Solo Group during this period allowed the arranging of withholding tax reclaims in Denmark and Belgium (also known as "cum-ex trading").

The FCA found that Sunrise failed to exercise due skill, care and diligence in applying its anti-money laundering policies and failed to properly assess, monitor and mitigate the risk of financial crime. In particular, the FCA were extremely concerned to find that Sunrise had onboarded 142 clients over a short period of time without carrying out adequate KYC checks.

For more information, please see our briefing here.

12. European Commission launches public consultation on the Mortgage Credit Directive

On 22 November 2021, the European Commission launched a consultation on its review of the Mortgage Credit Directive (2014/17/EU) (MCD).

The Commission is seeking views on whether improvements to the MCD are required, in particular relating to:

• Digitalisation: Firms are increasing their use of digital process, including to assess creditworthiness as well as the use of robo-advisers. Although digitalisation has benefits it also creates challenges for consumer protection, such as the risk of discrimination linked to automated credit decisions.
• COVID-19 crisis: COVID-19 has made consumers more financially vulnerable. The European Commission request feedback on whether COVID-19 specific relief measures, such as loan repayment moratoria, to alleviate the financial burden on consumers are relevant more generally.
• Proposed revision of the Consumer Credit Directive: The Commission adopted a proposal revising the Consumer Credit Directive (2008/48/EC) (CCD) in June 2021. Given the important similarities between the CCD and the MCD, the Commission is considering whether similar revisions are required to the MCD to ensure consistency of credit related directives.

13. BIS Consultative report: Extending and aligning payment system operating hours for cross-border payments

On 18 November 2021, the Bank for International Settlement issued a consultative report into extending and aligning payment system operating hours for cross-border payments. The report has been issued as part of the G20 cross-border payments programme. It looks at operating hours of real-time gross settlement (RTGS) systems and how an extension of RTGS operating hours could address current obstacles, increase the speed of cross-border payments and reduce liquidity costs and settlement risk. The report outlines three potential ways for extension: an incremental increase in opening hours on current operating days; an extension to current non-operating days; and the extension of operating hours to 24/7.

14. PSR consultation: Authorised push payment (APP) scams (CP 21/10)

On 18 November 2021, the Payment Systems Regulator (PSR) published a consultation paper on authorised push payment (APP) scams (CP21/10). This follows the PSRs February 2021 Call for Views on proposed measures to address APP scams. The PSR considers that participation in the industry's activity against APP scams must be widened to include non-signatories to the Contingent Reimbursement Model (CRM) Code.

Key proposals by the PSR include:

• requiring the 12 largest PSP groups in the UK (including most of the biggest High Street brands) and 2 largest PSPs in Northern Ireland outside those PSP groups to publish comparative data (e.g. on their performance in relation to levels of APP scams and reimbursement levels for their customers that are APP scam victims); and
• requiring the industry to improve intelligence sharing, via a joint industry working group, to improve the detection and prevention of APP scams.

The PSR also supports government plans to introduce legislation to make reimbursement mandatory for victims of scams.

The deadline for responses to CP21/10 is 14 January 2022 and the PSR intends confirm its final policy by the first half of 2022.

15. Keynote speech on EU Payments Market at European Payment Institutions Federation Annual Conference

On 16 November 2021, the European Commission published the keynote speech from this year's European Payment Institutions Federation Annual Conference. In the speech, Mairead McGuiness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, examined the changes and developments in the EU payments market.

The main areas covered included:

• Instant Payments: Instant and frictionless payments should become standard in Europe given their role in (i) supporting "innovative business models" such as payment initiation services; (ii) increasing competition; (iii) diversifying payment options available to consumers; and (iv) improving international transfers. The Commission is committed to taking any necessary steps to speed up the implementation of instant payments in the EU and plans to provide an instant payments initiative in the first half of 2022.
• IBAN discrimination: although a company or public body refusing to make or accept a payment from a non-domestic account is prohibited under the Single Euro Payments Area Regulation, this has not been fully enforced by a number of member states.

• Review of Payment Services Directive (PSD2): the Commission will launch an external study in early 2022 to evaluate PSD2 and set in motion any possible amendments. This will result in a Commission report by the end of 2022 for the European Parliament and Member States and a potential legislative proposal.
• Settlement Finality Directive: the Commission has completed consultations on the Settlement Finality Directive and are considering extending its scope to include e-money and payment institutions (subject to risk mitigation and appropriate supervision).
• Digital Markets Act: the Commission plans to address obstacles on using near field communications technology in mobile wallets in the Digital Markets Act, which Member States and the European Parliament are currently discussing.

16. HM Treasury and Bank of England release statement on Central Bank Digital Currency next steps

On 9 November 2021, HM Treasury and the Bank of England published a joint statement setting out the next stages of exploring a UK Central Bank Digital currency (CBDC). CBDC would be issued by the Bank of England to act as a new form of digital money for everyday use by households and businesses but would not replace cash and bank deposits and would instead alongside them. The Bank of England and HM Treasury had previously launched the CBDC Taskforce on UK CBDC in April 2021.

As part of the 'research and exploration' phase, HM Treasury and the Bank of England will initiate a consultation in 2022 outlining their examination of the case for a CBDC in the UK. The consultation will guide policy development over the next few years and determine whether the authorities can then move to the 'development' phase. The 'development' phase will most likely last a number of years and will involve in a technical specification and detailed testing of the best design for and feasibility of a UK CBDC.

17. ESG and Financial Regulation: Our top six predictions for the future

On 15 November 2021, off of the back of COP26, we published an article titled "ESG and Financial Regulation: Our top six predictions for the future".

Our top six predictions are as follows:

•  increasing focus on ESG data and consequently greater expectations on regulated firms to provide and use such data;
• the requirement for certain firms to publish a Net Zero transition plan;
• tightening up on ESG policies through the introduction of the FCA's five-tier sustainability badge system;
•  increased promotion and regulation of stewardship in the UK's Greening Finance roadmap;
• increased focus from the FCA on using technological solutions to verify sustainability data; and
• review and reform of remuneration structures and corporate culture.

For more information, please refer to our briefing here.

18. FCA publish Primary Market Bulletin 36 covering TCFD aligned climate-related disclosures for listed companies

On 15 November 2021, the FCA published its Primary Market Bulletin No. 36 which introduced a Task Force on Climate-related Financial Disclosures (TCFD) for listed companies and also set out its disclosure expectations and supervisory strategy.

Supervisory strategy

The FCA explained that whilst they are responsible for monitoring and enforcing compliance with the Listing Rules, Prospectus Regulation, the Disclosure Guidance and Transparency Rules and the Market Abuse Regulation, the Financial Reporting Council (FRC) will play a role in ensuring compliance with such rules.

In particular, the FRC will be responsible for reviewing the disclosures required subject to LR 9.8.6R(8) and the proposed LR 14.3.27R which covers TCFD-aligned disclosures, and for determining an appropriate supervisory strategy.

The newsletter also provided updates on the following areas:

• FRC will review TCFD disclosures as part of its review of annual financial reports;
• Details on non-compliance with the requirement to file a TCFD statement; and
• Efforts to review notifications made from stakeholders about breaches.

Disclosure expectations

The newsletter noted that the FCA has published a technical note for consultation (Primary Market/TN/802.1). It will publish guidance on its disclosure expectations in due course.

No updates included for this fortnight's edition of the FSS.