Financial Services SpeedRead 29 September 2021

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

1. ESMA launches consultation on reviewing the MIFID II best execution reporting requirements

On 24 September 2021, ESMA published a consultation paper on the planned enhancements to the MiFID II best execution reports framework.
ESMA's suggested technical changes include amendments to Delegated Regulation (EU) 2017/575 (RTS 27) and Delegated Regulation (EU) 2017/576 (RTS 28) to:

• simplify the reporting obligations for execution venues towards a set of seven indicators which will enable firms to effectively evaluate the execution quality of venues; and
• clarify the reporting requirements for client orders or decisions to deal which have been transmitted or placed to a third party for execution.
  ESMA's proposals cannot be applied until the applicable provisions of MiFID II are amended. However, ESMA will consider the results of the consultation when assisting the EU Commission to evaluate the current best execution framework and potential future improvements.

The consultation closes on 23 December 2021. ESMA will consider responses during Q4, and, if needed, will send proposals to the EU Commission during the first half of 2022.

2. Chancellor signals review of key areas of UK financial regulation following publication of 'Lessons from Greensill Capital' report

On 24 September 2021, the Treasury Committee published responses from the Government, the FCA and the BoE to the Treasury Committee's report, on 'Lessons from Greensill Capital'. In a letter to the Chair of the Committee, Chancellor Rishi Sunak called for immediate reviews of the change of control and appointed representative regimes following

The Chancellor agreed with the Committee's recommendation to review the change of control regime. The Chancellor confirmed the FCA, PRA and HM Treasury are working together to consider how change of control applications are dealt with and what changes might need to be considered, for example to ensure sufficient relevant information is received from an applicant for a change of control, to ensure Regulators are able to fully assess the risks of the proposal in a timely manner.

The Chancellor also welcomed the Committee's recommendation regarding reform of the appointed representative regime so as to limit its scope, increase the supervision of appointed representatives and lessen opportunities for abuse.

The Chancellor rejected the Committee's idea of broadening the definition of securitisation to incorporate supply chain finance. However, the Government will consult with the regulators regarding any potential new regulatory requirements for non-tranched loans.

3. HMT publish regulation updating section 9C of FSMA

On 15 September 2021 HMT published The Financial Services and Markets Act 2000 (Prudential Regulation of FCA Investment Firms) (Definitions for the purposes of Part 9C) Regulations 2021 (SI 2021/1046) (the "Regulations").

The purpose of the Regulations is to expand on Part 9C Prudential Regulation of FCA Investment Firms of FSMA ("Part 9C"), which was introduced by the Financial Services Act 2021. The Regulations expand on Part 9C by introducing definitions of "parent undertaking" and "group", instead of relying on the pre-existing definitions under FSMA. The introduction of the two definitions, according to the explanatory memorandum, aims to bring the IFPR regime in line with the CRR to align the scope of the relationships taken by both regimes.

Under Part 9C, the FCA have the power to introduce rules in relation to parent undertakings of FCA regulated firms. As well as this, Part 9C introduces the IFPR – a new regime for the prudential regulation of non-systemic UK investment firms by the FCA – which is expected to come into force on 1 January 2022.

The Regulations will come into force on 6 October 2021. The Regulations can be accessed here.

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

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

4. JMLSG publish updated revisions to AML guidance

On 23 September, The Joint Money Laundering Steering Group (JMLSG) published draft revisions to Part I Chapter 5.7 (Monitoring customer activity) of its Guidance. The draft revisions do not materially alter in-scope firms' obligation to monitor their AML customers' activities. However, it does make clear that firms should establish an appropriate governance mechanism for the oversight, review and approval of monitoring processes and parameters, which will include documenting its monitoring arrangements and rationale. This may include consideration of the following, for example:

• defining responsibilities for the governance mechanism;
• measuring the effectiveness and relevance of monitoring arrangements;
• supporting changes to systems to address evolving money laundering and terrorist financing risks; and
• approach and governance for reallocation of resource (e.g. turning off/dialling down less efficient monitoring parameters or introducing different parameters).

Comments on the revisions should be received by 30th October 2021.

5. Economic Crime (AML) levy: HM Treasury releases consultation response and draft legislation

On 21 September 2021, HM Treasury issued its response to its consultation on the proposed Economic Crime Levy (ECL) and published the draft legislation to enact it.

The Government's responses clarified how the ECL will be spent, quantified, applied and collected:

• AML regulated entities will be first charged the ECL between 1 April 2022 to 31 March 2023 and the first ECL payment will be made in the year 2023/2024.
• Funds from the ECL should only be used for resources combatting money laundering.
• A money laundering risk metric will not be included in the ECL calculation due to concerns it may be unpredictable and disincentivise reporting.
• If a firm is AML regulated at any point in a levy year, the firm will pay a levy determined by its size (small, medium, large and extra-large). This will be based on its UK revenue throughout its period of accounts that ends in the levy year.
• Small entities (UK revenue under £10.2 million) will be exempt from paying the ECL.
• There will be a pro rata adjustment if the firm is only regulated for a part of a levy year (1 April to 31 March).
• The ECL will be collected by HMRC, the FCA and the Gambling Commission. HMRC will collect the ECL for in-scope legal and accountancy firms currently supervised by the 22 Professional Body Supervisors.

11. FCA's Q&A on the proposed consumer duty

In our previous briefing, we covered the FCA's recent consultation paper (CP21/13) on a new Consumer Duty and the six key takeaways around its proposals. On 10 June 2021, the FCA gave its first seminar and Q&As on the proposed Consumer Duty. During the seminar, there were many questions on what Consumer Duty means and how it will affect financial services firms.

7. EBA report on the use of digital platforms in the EU banking and payments sector

On 21 September 2021, the EBA published a report on the use of digital platforms. The EBA identifies a rapid growth in the use of digital platforms in the EU’s banking and payments sector and states that "platformisation" is resulting in new dependencies between financial and non-financial firms, but that supervisors are facing challenges in monitoring developments. The report defines a digital platform as a technical infrastructure that enables at least one financial institution directly (or indirectly using a regulated or unregulated intermediary) to market to customers, and/or conclude with customers’ contracts for financial products. The report is informed by a number of sources, including the responses to the EBA’s November 2020 competent authority survey on financial institution dependencies on digital platforms and regulatory and supervisory issues.

In the report, The EBA sets out a number steps to enhance supervisory capacity to monitor market developments, including the following:

• Regulatory perimeter: although the EBA is not proposing any immediate further action regarding the regulatory perimeter, it will continue to monitor the activities of comparison websites and their regulatory treatment.

• Supervising compliance with consumer protection and conduct of business requirements: the EBA states that use of digital platforms for the marketing and conclusion of contracts for financial products and services posed compliance monitoring and enforcement challenges. The report identifies a need to clarify the scope of application of the DMFSD, particularly in the context of digital platforms.
• AML/CTF risks: the report notes that a number of national competent authorities indicated that the use of digital platforms for the marketing/conclusion of contracts and services increased ML/TF risks. This was mainly attributed to the use of remote means for the onboarding (and variations between authorities regarding expectations for these processes), the difficulties in carrying out comprehensive KYC in situations of cross-border activities, as well as the reliance on third parties for customer due diligence purposes. The EBA argues that these issues are not unique to digital platforms and confirms that it is currently developing guidelines in relation to onboarding as required under the EU's 2020 Digital Finance Strategy.

8. Rise in complaints made to FOS in relation to cryptocurrencies during the pandemic

On 24 September 2021, the Financial Ombudsman's news update, "Ombudsman News" noted that the Ombudsman Service has seen an increase in complaints about cryptocurrencies during the Covid-19 pandemic. Despite the fact that cryptocurrencies are unregulated investments, the Ombudsman Service has the power to investigate complaints made against providers who refuse to reimburse consumers that allege to be victims of cryptocurrency fraud.

9. Sheldon Mills (FCA) delivers speech on culture, D&I and climate change

On 24 September 2021, the FCA published a speech given by Sheldon Mills, Executive Director, Consumers and Competition, that was delivered on 22 September 2021 at the IA Culture in Investment Management Forum.

The speech, "A regulatory perspective: measuring and assessing culture, now and in the future, the role of purpose and the importance of D&I", focussed on three main topics:

1. Culture and purpose;
2. Diversity and inclusion; and
3. Climate change and sustainability.

Culture and purpose

Discussing the topic of culture and purpose, Sheldon Mills noted that this remained as "important as ever".

He highlighted that the FCA assesses a firm's culture against four key pillars: "purpose, people, leadership and governance". He provided a non-exhaustive list of examples that come under these four pillars which included: "significant business model restructures, the approach to remuneration, speak-up culture, Board and ExCo composition, diversity, succession planning, the application of the SMCR, the effectiveness of a firm’s controls environment or its governance structures."

Further, Mr Mills explained that a key part of culture and purpose is how employees are incentivised by their employers. He stated that the FCA pay attention to how renumeration is awarded in terms of both financial and non-financial measures and those awarding renumeration should be questioning whether "bonuses reflect the firms purpose".

Diversity and Inclusion

Mr Mills addressed the fact that diversity issues continue to be prevalent in the investment management sector. He first discussed the gender-pay gap and the underrepresentation of women in senior management positions. The FCA published a Discussion Paper on this topic in July which can be accessed here. For further information please see our update note here.

The FCA "expect firms to collect data, actively monitor it with interest and take bold action where needed."
Climate change and sustainability

In his speech, Mr Mills commented that the FCA expect firms to drive meaningful progress in relation to climate change and sustainability and not simply use it as a marketing tool.

Mr Mills noted that this means first must step up and be "active stewards" by "setting incentives for their boards and management".
The full transcript of Sheldon Mills' speech can be accessed here.

10. HM Treasury, FCA and Bank of England respond to future framework for regulation of financial services

On 20 September 2021, the Treasury Committee received responses from HM Treasury, the FCA, and the Bank of England regarding their report, The Future Framework for Regulation of Financial Services.

Each party's responses are summarised below:

HM Treasury

• Independent Regulation – The Treasury agreed with the importance of the regulators' operational independence.
• On-shoring and regulators' rulebooks – The Treasury reiterated the Government's approach that the regulators should be responsible for deciding the direct regulatory obligations for firms which fit within the Government and Parliament's general policy framework.
• "Targeted approach" to scrutiny of regulators – The Treasury agreed with the Committee's more detailed scrutiny of the regulators' activities if it is in the public's wider interest.

HM Treasury will provide more detailed responses later in the autumn 2021.

FCA

• FCA Rule Making - The FCA welcomed not incorporating added ex-ante enquiry in rule-making procedures, as well as more Parliamentary consultation with the FCA.
• Accountability to Parliament – The FCA supported the continued scrutiny and engagement of the FCA's work by Parliament and the Committee and reiterated their willingness to be available to answer Parliament's committees.
• Independent Regulation – The FCA highlighted the importance of independent regulation and striking the correct balance between ensuring cohesion with the Treasury and safeguarding regulatory independence.
• Relationship between FOS and FCA– The FCA confirmed they are working with the Ombudsman to see if changes need to be made to rights of redress where the Ombudsman's decisions go against the FCA's regulatory principles.

Bank of England

• On-shoring and regulators' rulebooks – The Bank of England welcomed the increased cohesion and tailored prudential regime that would result from incorporating the relevant retained EU law into the rulebook, but noted that sufficient resources will be needed for the regulators to implement this "major undertaking".
• Regulatory framework key principles– To ensure an effective regulatory framework, the Bank of England stressed the importance of fixed and balancing objectives which clearly define responsibilities and accountability, as well as adopting a UK-tailored but international approach.