Financial Services Speedread 25 January 2023 edition

1. FCA: Webpage update on the Temporary Permissions Regime

On 6 January 2023, the FCA updated its webpage to include additional information regarding the Temporary Permissions Regime (TPR). The FCA focuses on four scenarios, which might result in disciplinary actions against a TPR firm. These scenarios involve:

• firms failing to respond to the FCA's mandatory information requests: the FCA has cancelled the temporary permissions of 4 firms that did not respond to its mandatory information requests. These firms can no longer conduct regulated business in the UK and if they continue to do so, they may be committing a criminal offence;
• firms regulated under the Financial Services and Markets Act 2000 (FSMA), which miss their landing slot or fail to apply by 31 December 2022: a firm in this position will be expected to voluntarily apply to cancel its temporary permission and either enter the supervised run-off (SRO) mechanism or leave the UK regulatory perimeter;
• firms that do not intend to apply for full authorisation: firms without a valid reason for not seeking full authorisation would be expected to voluntarily apply to cancel their permission and either enter the financial services contracts regime (FSCR) or leave the UK regulatory perimeter; and
• firms whose application for full authorisation is rejected, withdrawn or refused: this will typically occur if a TPR firm fails to meet the FCA's standards. Rejection results in the TPR permission being cancelled with the TPR firm moving to either: (i) the SRO or contractual run-off (CRO) mechanism; or (ii) leaving the UK regulatory perimeter. Following a rejected or withdrawn application, a firm within scope of the TPR cannot re-apply while still within the TPR.

2. European Commission: Summary of responses regarding the regime applicable to the use of benchmarks administered in a third country

On 10 January 2023, the European Commission published a summary of results and feedback from the consultation on the regime applicable to the use of benchmarks administered in a third country, carried out between 20 May and 12 August 2022.

The consultation was conducted to assist the European Commission in understanding and seeking views on the expected effects that the EU Benchmark Regulation may have on the use of benchmarks in the EU and benchmarks provided outside the EU.

Responses, from 64 valid contributions, indicated the following:

• there is broad support for the reform of the Benchmark Regulation (BMR) third country regime towards a narrower scope, covering only a designated set of benchmarks;
• there was a wide range of views regarding the factors to take into account in determining whether a benchmark warrants designation; and
• respondents broadly agreed that the labels for an EU ESG benchmark should be open standard i.e. accessible to EU as well as non-EU administrators.

3. FCA: Wholesale brokers portfolio letter

On 11 January 2023, the FCA published a portfolio letter on its supervisory strategy for wholesale brokers. The letter sets out the FCA's view of the most important risks arising from wholesale brokers. The letter notes that since the FCA's last letter setting out its supervisory strategy for the sector in 2019 periods of sustained volatility have created heightened financial, credit and operational risks in many parts of the markets where wholesale brokers are active. The FCA's work suggests that wholesale broking firms continue to lag in terms of conduct and culture.

Areas identified by the FCA include the following:

• financial resilience: in the FCA's view, firms underestimate their liquidity risks and needs. Firms should review the level of liquidity they hold under the Investment Firm Prudential Regime (IFPR). Further, firms should seek to model stress events in more extreme or reverse stress scenarios and consider what they might need in these circumstances. Similarly, firms should note that many market stresses will include a systemic event rather than an idiosyncratic one, so firms should consider a feedback loop as a matter of course;
• governance and culture: firms should continue to embrace SMCR to promote good decision-making and individual accountability, with an understanding that: (i) the nature of their business means relatively junior employees can expose the firm, its clients and the market to significant risk of harm; and (ii) hiring individuals who have been disciplined elsewhere will be met with little sympathy from the FCA;
• remuneration structures: the FCA is concerned about weak incentive structures. Lower salaries with large cash bonuses based on volume of trades concluded for clients can lead to short-termism and encourage brokers to push trades. This can also reduce firms’ ability to penalise brokers for misconduct identified after bonuses are paid. Firms should ensure their remuneration structures comply with IFPR; and
• control functions: the FCA’s recent work showed a need for significant improvement in wholesale brokers’ client onboarding processes to control financial crime and money laundering.

The FCA advises all CEOs to have discussed the letter with their fellow directors and/or the board and to have agreed actions and/or next steps by the end of February 2023.

4. FCA: Consultation paper on streamlining transparency rules on structured digital reporting of annual financial statements by companies (CP23/2)

On 12 January 2023, the FCA published a consultation paper on streamlining transparency rules on structured digital reporting of annual financial statements. The consultation paper set out changes and proposals to streamline existing rules, which require certain companies with securities admitted to UK regulated markets to prepare, publish and file with the FCA their annual financial report in an electronic format and for the financial statement within it to be in a structured digital format.

The FCA intends for structured digital reporting to support efficient price formation and investors' decision-making, which in turn promotes market integrity in line with the FCA's operational objective.

The FCA is also proposing to simplify the structure of its current rules by:

• deleting an existing regulatory technical standard (the Technical Standards) onshored from EU law;
• relocating substantive requirements directly into the FCA's Disclosure Guidance and Transparency Rules sourcebook (DTRs); and
• proposing new guidance in a Technical Note on the FCA website to indicate what the FCA considers to be ‘generally accepted taxonomies’ . These are the detailed templates used by companies to label or ‘tag’ specific information in their annual financial reports, which are based on the International Financial Reporting Standards (IFRS).

The consultation paper will also be of interest to advisory firms and service providers who support companies in meeting their obligations under DTR 4.1. and the Technical Standards, as well as software vendors and other enterprises who supply the software and technology infrastructure that enable structured digital reporting.

Regarding next steps, the FCA has asked for comments and feedback on the consultation paper by 24 February 2023.

5. ESMA: Press release on marketing financial products

On 16 January 2023, the European Securities and Markets Authority (ESMA) published a press release in relation to marketing of financial products. The press release states that over the course of 2023, ESMA will launch a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MiFID II disclosure rules with regards to marketing communications across the European Union. The purpose of this CSA is to ensure the consistent implementation and application of EU marketing rules, as well as enhance the protection of investors in line with ESMA's over-arching objectives.

As part of the CSA, NCAs will review whether marketing communications are fair, clear and non-misleading and how firms select the target audience for the marketing communications, especially in the case of riskier and more complex investment products. The vulnerability of younger, less experienced investors was also highlighted in the press release. The CSA will closely consider marketing and advertising by firms through distribution channels, including apps, social media and collaborations with affiliates such as influencers.

The CSA also presents an opportunity for ESMA to collect information about possible greenwashing practices observed in marketing communications and advertisements.

6. European Commission: Delegated acts amending RTS 1 and RTS 2 adopted

On 17 January 2023, the European Commission adopted delegated acts amending regulatory technical standards laid down in Delegated Regulation (EU) 2017/587 as regards certain transparency requirements applicable to transactions in equity and non-equity instruments. These are RTS 1 (together with accompanying annexes) and RTS 2 (together with accompanying annexes). The amendments concern certain reporting fields, flags and transitional provisions. This follows ESMA's December 2022 opinion responding to the European Commission's proposed amendments.

Among other things, the delegated act amending RTS 1:

• harmonises the types of transactions considered as non-price forming (for, among other things, the application of the negotiated trade waiver);

• increases the threshold above which orders and transactions in exchange traded funds benefit from the large in scale waiver and deferral;
• clarifies the legal status of so-called "hybrid systems"; and
• provides details on delivery of data to competent authorities in relation to calculations of the average daily turnover, average value of transactions, as well as which market is the most relevant market in terms of liquidity.

Among other things, the delegated act amending RTS 2:

• specifies that the minimum size of orders held in an order management facility should be based on the notional amount of the traded contracts;
• introduces amendments to Annex II of RTS 2 regarding the details to be provided in post-trade transparency reports; and
• introduces amendments to Annex III of RTS 2 specifying the liquidity assessment, large in scale thresholds and size specific to the instrument thresholds for non-equity instruments.

EU legislators will now review the draft delegated acts. If neither object, the delegated acts will enter into force 20 days after publication in the Official Journal of the EU.

7. ESMA: Consultation paper on manual for post-trade transparency fields

On 19 January 2023, ESMA published a consultation paper on a manual for post-trade transparency fields. This follows the adoption of delegated acts amending RTS 1 and RTS 2 by the European Commission in January 2023 (see above). Although the amendments have yet to be endorsed by EU co-legislators, the consultation is based on the texts adopted on 17 January 2023.

The manual on post-trade transparency is intended to be a practical tool to support implementation of applicable post-transparency requirements. It will give a general overview of the post-trade transparency regime for equity, equity-like and non-equity instruments and will include in one single document: (i) legal references of Level 1 (MiFIR / MiFID II); (ii) legal references of Level 2 (RTS); (iii) legal references of Level 3 (Opinions/Guidelines); (iv) guidance included in previously published Q&As; and (v) new Level 3 guidance. ESMA states that the manual does not provide EU law interpretation or contain supervisory elements.

Areas to be covered in the manual are: (i) the scope of instruments and transactions subject to post-trade transparency; (ii) the relevant entities in charge of the reporting and publication of post-trade transparency information; (iii) when post-trade transparency information has to be made public (real-time vs. deferred publication); (iv) post-trade transparency information to be made public, i.e. reporting fields and flags; and (v) the common aspects as well as the differences between the post-trade transparency regime and the transparency calculations in relation to the scope of instruments and transactions.

The deadline for comments is 31 March 2023.

8. BoE: Version 3.6.0 PWD release note on data collection for banks, building societies and investment firms

On 9 January 2023, the Bank of England (BoE) published a release note titled Version 3.6.0 PWD. This release note provided an update to the BoE's leverage ratio reporting framework, to support data collection relating to contingent leverage risks and trading exposures where these risks are most likely to arise. The BoE also updated its website to reflect the addition of Version 3.6.0 PWD to its data collection taxonomy.

All other reporting frameworks remain unchanged and the BoE welcomes feedback on the release note by 3 February 2023.

9. PRA: Dear CEO letter to UK deposit-takers and international banks

On 10 January 2023, the PRA published letters concerning its key 2023 priorities and supervisory expectations to UK deposit takers and international banks.

The PRA notes that the priorities and expectations it lists are not intended to be exhaustive, but provide an overview of its priorities for the year ahead. Key points from the letters include:

• Financial resilience. The PRA expects the operating environment to remain challenging as a result of the volatility in financial markets and the weak global economic outlook. Firms are expected to proactively assess the implications of the evolving economic outlook. The PRA states that its continued focus on financial resilience will comprise ongoing assessments of individual firms' capital and liquidity positions, as well as how these can change. For UK deposit takers, areas of focus will include the impact of changing retail and wholesale funding conditions;
• Credit risk. Deposit takers are advised to ensure that credit risk management practices are robust and that portfolios are closely monitored. The PRA's assessment of credit risk management will involve it looking at firms’ early warning indicator frameworks. Firms are told to expect increased engagement with the PRA, including targeted requests for enhanced data and analysis;
• Risk management and governance. The PRA states that despite its messaging, firms continue to obtain large and concentrated exposures to single counterparties. The PRA will focus on firms’ ability to monitor and manage counterparty exposures, particularly to non-bank financial institutions. Firms are also expected to have learnt lessons from past events and have ensured that these are embedded through the first and second lines of defence. The PRA confirms that firms’ risk management, governance and control frameworks will continue to be monitored through individual and cross-firm thematic reviews;
• Operational resilience. The PRA refers to its Supervisory Statement on operational resilience (see our briefing here) and states that firms should have by now identified and mapped their Important Business Services under the framework, set impact tolerances for these and have started a programme of scenario testing. The PRA also states that it has identified a material increase in services being outsourced and expects firms to manage outsourcing risk accordingly. The PRA's focus will be using this framework and the testing that firms are conducting to assess impact tolerances;
• Model risk. Deposit takers are advised to review the PRA's finalised model risk management principles (expected to be published in H1 2023) and make any necessary changes; and
• Data. The letters stress the importance of complete, timely and accurate regulatory returns. The PRA notes that skilled persons reviews have repeatedly revealed deficiencies in the controls over data, governance, systems, and production controls related to regulatory reporting.

10. BoE: Updated webpages regarding LIBOR

On 9 January 2023, the BoE updated its website to include additional information on the London Interbank Offered Rate (LIBOR). The updates were made on the following webpages:

• transition from LIBOR to risk-free rates;
• key resources for firms transitioning from LIBOR; and
• Working Group on Sterling risk-free reference rates.

The updates indicate that 27 LIBOR settings have ceased permanently, 3 'synthetic' GBP settings remain and 5 USD LIBOR settings are available until mid-2023. The BoE also notes that one and six month synthetic GBP LIBOR will cease at the end of March 2023 and three month synthetic GBP LIBOR will cease at the end of March 2024.

11. FCA: Webpage update regarding UK EMIR

On 10 January 2023, the FCA updated its webpage to include additional information regarding the UK European Market Infrastructure Regulation (UK EMIR). UK EMIR covers derivates, central counterparties and trade repositories.

The additional change indicates that following Treasury legislation, the period during which the Share Trading Obligation (STO) and Derivatives Trading Obligation (DTO) Temporary Transitional Power (TTP) directions may continue to apply, has been extended to 31 December 2024.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

12. FCA: Decision Notice: Al Rayan Bank Plc

On 11 January 2023, the FCA issued a Decision Notice addressed to Al Rayan Bank Plc (Al Rayan) in respect of a fine for £4,023,600 imposed as a result of poor anti-money laundering systems in breach of Principle 3 of the FCA's Principles for Businesses.

The FCA found that between 1 April 2015 and 30 November 2017, Al Rayan failed to take reasonable care to organise its affairs responsibly and effectively, with adequate risk management systems and have policies and procedures in place, comprehensive and proportionate to its business activities, to enable it to identify, assess, monitor and manage money laundering risk. In particular, the FCA found that Al Rayan did not have appropriate policies and procedures in relation to the application of enhanced due-diligence and establishing high-risk customers’ source of wealth and source of funds at the point of onboarding despite acknowledging the high-risk of financial crime. Al Rayan was also specifically made aware of the risks by the FCA during the relevant period, but it failed to remediate those weaknesses.

In line with the FCA's three-year strategy, it will continue to raise the stakes for firms that do not prevent money laundering risks which harms confidence and integrity in the market and do not take their financial crime responsibilities seriously. 

Al Rayan agreed to settle early and so qualified for a 30 per cent. discount, thus reducing the financial penalty of £5,748,000 to £4,023,600.

No updates for this edition of the FSS.

13. EBA: Report on peer review regarding authorisation under the Payment Services Directive

On 11 January 2023, the European Banking Authority (EBA) published its peer review report (the Peer Review) on the authorisation of payment institutions (PIs) and e-money institutions (EMIs) under the revised Payment Services Directive (PSD2). The Peer Review also considers the extent to which competent authorities (CAs) implement the 2017 EBA Guidelines on authorisation, which were issued in support of PSD2.

The Peer Review indicates that CAs have largely implemented the 2017 EBA Guidelines and where implemented, the Guidelines have achieved their objective of greater consistency and transparency in the authorisation information that prospective PIs and EMIs have to submit.

However, the Peer Review equally notes that some CAs have not fully implemented the 2017 EBA Guidelines in relation to obtaining the full set of information from applicants. There are also significant divergent practices in relation to the assessment of business plans, applicants' governance arrangements and internal control mechanisms. As a result, applicants remain subject to different supervisory expectations regarding certain requirements for authorisation as a PI or EMI across the EEA.

To assist with this divergence, the report sets out best practices developed by some CAs that might be of benefit for other CAs to adopt. These include:

• enhancing the transparency and efficiency of the authorisation process;
• comparing applicants' forecasts against data from similar PIs/EMIs to inform the CAs' assessment of the business plan and the plausibility of the financial forecasts;
• ensuring the sound and prudent management of PIs and EMIs by providing guidance on supervisory expectations around internal control mechanisms; and
• applying the guidance set out in the joint EBA and ESMA Guidelines when assessing suitability of directors and persons responsible for management of PIs and EMIs, as well as providing clarity on the criteria used.

In addition, the Peer Review recommended that, as part of the EBA's ongoing PSD2 review process, the European Commission should clarify the delineation between the different categories of payment services, clarify the applicable governance arrangements for PIs and EMIs and mandate the EBA to develop a common assessment methodology for granting authorisation as a PI or an EMI.

14. HM Treasury: Review and call for evidence on Payment Services Regulations

On 13 January 2023, the Government published a review of the Payment Services Regulations 2017 and a call for evidence on how UK payments regulation should adapt to continue to meet the Government’s aims and address the specific challenges highlighted in the review. Challenges include keeping pace with market developments, such as developing an ecosystem for Open Banking and the emergence of cryptoassets.

Although the focus of the statutory review is on the Payment Services Regulations 2017, the Government is also using the call for evidence as an opportunity to seek views in relation to the Electronic Money Regulations 2011; the Cross Border Payments Regulation; and other areas pertinent to payment services in the UK. The Government is assessing the current regime against the following objectives: achieving agile and proportionate regulation; ensuring appropriate trust and protection for consumers; ensuring the resilience and integrity of UK's payment market; and fostering competition, in the interests of consumers.

The deadline for comments is 7 April 2023.

15. HM Treasury: Post implementation review of the Payment Card Interchange Fee Regulations 2015

On 13 January 2023, HM Treasury issued a post-implementation review of the Payment Card Interchange Fee Regulations 2015 (PCIFRs). The PCIFRs implemented aspects of the Interchange Fee Regulation 2015 (IFR), which caps interchange fees charged for the acceptance of consumer debit and credit cards. The PCIFRs principally designated the Payment Systems Regulator (PSR) as the competent authority to monitor IFR, while the FCA was also designated as co-competent, specifically in relation to monitoring and enforcing compliance with certain articles under the IFR. The Government considers that the policy objective of appointing an appropriate competent authority with powers to enforce the IFR has been achieved.

The Government notes that the Future Regulatory Framework Review will ensure that the competent authorities have the powers they need in future to be able to replace direct regulatory requirements in retained EU law, including in relation to payments policy. It confirms that the wider approach to interchange fee policy will be determined under the Future Regulatory Framework Review. The Government confirms that when the interchange fee policy is reviewed, adjustments may be needed to the powers of the authorities under the PCIFRs.

16. UNIDROIT: Consultation on Digital Assets and Private Law

On 10 January 2023, the International Institute for the Unification of Private Law (UNIDROIT) published a consultation regarding the draft UNIDROIT principles on digital assets and private law.

The consultation aims to discuss and highlight principles designed to facilitate transactions in digital assets and ensure that the principles are well suited to application in different contexts, including both civil law and common law jurisdictions, as well as developing or emerging markets. It recommends that states adopt legislation consistent with these principles.

UNIDROIT also seeks feedback from parties operating and engaged in the digital asset industry, on whether the ideas proposed in the consultation sufficiently address the private law issues which arise in digital asset transactions.

The deadline to submit comments and feedback to the consultation is 20 February 2023.

No updates for this edition of the FSS.

17. FCA: Podcast interview on the Consumer Duty

On 17 January 2023, the FCA released the transcript of its podcast interview with the FCA's Manager of Consumer Policy Outcomes, Richard Wilson. The 'Inside FCA Podcast' host, Ozge Ibrahim, asked Richard Wilson a series of questions regarding the Consumer Duty. The key questions and responses include:

• clarifications about the products and services outcome and how it fits into the Consumer Duty: The FCA wants to see products and services designed to meet the needs of a clearly defined target market and expects firm to ensure that products and services work as anticipated and that these products and services are sold to the right people, i.e. only to the people in the target market;
• how the Consumer Duty requirements relate to existing product governance requirements: The FCA notes that where a firm must currently comply with product governance rules, it should continue to do so because those rules are broadly equivalent and the outcome should be the same as if the Consumer Duty were applied. However, Consumer Duty rules apply to all products and services, regardless of when they were launched, whereas certain product governance requirements applied from a particular point in time;
• whether or not the rules apply equally to products and services: The FCA responded by confirming that the rules will apply equally to products and services delivered to retail customers;
• identifying target markets: The FCA notes that the Consumer Duty requires the target market to find a sufficiently granular level. As a rule of thumb, Richard Wilson suggested that the target market should be defined in enough detail to avoid including any group of customers who would suffer harm from that product or service. While determining the target market, firms should also consider the design and features of their product or service, as well as the risks or complexity of the product or services. The FCA also expects firms to monitor outcomes for their customers, in order to test and confirm if the target market has been identified appropriately;
• manufacturer reviews: Manufacturers must regularly review their products and services, distribution strategies and implementation of distribution strategies. Manufacturers should consider what information they require from their distributors and take reasonable steps to gather it. It is not necessary for distributors to share information about individual customers. Distributors are required to conduct their separate reviews;
• vulnerability: The FCA does not expect firms to review individual customers or track their potential vulnerability. Instead, it wants firms to consider whether their product or service has features that could risk harm for any group of customers, including vulnerable customers, and how to mitigate these risks;
• product and services testing: What is appropriate will, in the FCA's view, depend on the circumstances. Firm are expected to think about how the needs and circumstances of the target market are likely to change. For some products, this might be complex quantitative testing, looking at how investments perform in different scenarios;
• how the FCA intends to monitor and process firms' implementation plans for the products and services outcome: The FCA is currently looking at firms' implementation plans and will provide feedback on these; and
• key milestones: By April 2023, Richard Wilson states that the FCA would like in-scope manufacturer firms to have reviewed any products or services already on the market and which will continue to be sold after July 2023. The deadline is to ensure that firms can complete their review and mitigate any issues they have seen ahead of the July 2023 deadline for applying the Consumer Duty.