Financial Services SpeedRead 30 November 2022 edition

1. FCA: Interim Report and Discussion Paper on the Credit Information Market

On 22 November 2022, the FCA published an interim report on improvements needed in the credit information market, for the purpose of delivering better lending decisions for borrowers and delivering higher quality, more comprehensive information for consumers and firms.

In the interim report, the FCA set out the following proposals:

• establishing a new, more representative and accountable industry body to oversee arrangements for the purpose of sharing credit information;
• improving the quality and coverage of credit information;
• enabling greater competition and innovation through potential changes to data access arrangements and more timely data reporting; and
• simplifying ways for consumers to access their credit file and dispute any inaccurate information held about them.

2. ESMA: Consultation Paper: Review of the technical standards under Article 34 MiFID

On 17 November 2022, ESMA released a press release requesting feedback on Article 34 of the MiFID II technical standards on investment services provision across the EU. The key amendments relate to the provision of information at the passporting stage, such as:

•  the Member States in which a firm's passport will actively be used, and what categories of clients will be targeted;
•  how a firm will be marketing in Member States;
• a firm's language capabilities to deal with complaints in various Member States; and

• how a firm is organised internally with regard to its cross-border activities.

The consultation closes on 17 February 2023.

3. ICE: Cessation of all USD LIBOR ICE Swap Rates after 30 June 2023

On 14 November 2022, the ICE Benchmark Administration published a feedback statement confirming it will cease publishing all USD LIBOR ICE Swap Rate runs for all tenors after its last publication on 30 June 2023. All parties who use USD LIBOR ICE Swap Rate should note the last date of publication and should ensure any affected agreements have provisions to address this.

No updates for this edition of the FSS.

4. ESMA: Speech by Natasha Cazenave: Supervisory priorities and challenges for Investment Managers

On 18 November 2022, the Executive Director of ESMA, Natasha Cazenave, delivered a speech discussing key challenges currently faced by the asset management industry, namely the sustainable finance journey, the deteriorating macro-economic situation and heightened risks in the financial markets.

The speech also discussed ESMA's actions and approach to addressing these challenges.

Sustainable finance was highlighted as a key area which currently impacts the new disclosure and risk management requirements relevant to the asset management industry, and ESMA is currently progressing its implementation of the European Sustainable Finance framework. The following ESMA reports aim to address concerns in relation to sustainable finance:

• the incoming Union Strategic Supervisory Priority;
• Guidance on draft guidelines regarding the use of ESG or sustainability-related terms in fund names (published on 18 November 2022, and considered in the ESG section of this edition of the Financial Services SpeedRead); and
• a Call for Evidence on greenwashing (published on 15 November 2022, and considered in the ESG section of this edition of the Financial Services SpeedRead).

Liquidity, market and credit risks are all elevated in the current climate, and ESMA expects the asset management industry to vigilantly monitor and manage risks appropriately. In addition, the following proposals were made for the purpose of offsetting these macro-economic issues:

• higher levels of liquidity buffers, through weekly and daily maturing assets, in order to ensure greater liquidity and reduce risk in the portfolio; and
• the enhancement of money market funds' reporting requirements, to ensure more frequent reporting in stressed market conditions, with a subset of key indicators and a more frequent full reporting in normal times (from quarterly to monthly); and

In relation to open-ended funds, Ms. Cazenave highlighted the benefits of reviewing the AIFMD and UCITS Directive which foresee the creation of an EU-wide reporting regime for UCITS, the need for tools which mitigate risks related to liquidity and leverage, and the importance of macroprudential stress testing at fund level.

No updates for this edition of the FSS.

5. EBA: Final Report on Guidelines on the use of Remote Customer Onboarding Solutions under MLD4

On 22 November 2022, the EBA issued a Final Report containing Guidelines on the use of remote customer onboarding solutions under MLD4. The Guidelines have been developed in response to the European Commission’s request in the context of its 2020 Digital Finance Strategy, owing to the lack of clarity in the existing framework. The Final Report follows the EBA's December 2021 consultation paper.

The Guidelines outline the steps credit and financial institutions should take when choosing remote customer onboarding tools, and actions that should be undertaken to satisfy themselves that the chosen tool is adequate, reliable and enables them to comply effectively with their initial customer due diligence obligations. This include requirements:

• to maintain policies and procedures to comply with obligations under MLD4 where the customer is onboarded remotely;
• to carry out a pre-implementation assessment of the remote customer onboarding solution when considering whether to adopt a new remote customer onboarding solution;
• to conduct ongoing monitoring of remote customer onboarding solutions;
• in relation to policies and procedures concerning remote customer onboarding functions and activities carried out by third parties or by another outsourced service provider; and
• concerning managing information and communications technology risks.

The EBA states that where simplified due diligence could be applied, aspects of the Guidelines relating to the nature and type of verification data and documentation may be adjusted in line with a risk-based approach.

The Guidelines will enter into force 6 months after their publication in all EU official languages.

6. HM Treasury: Updated advisory notice on money laundering and terrorist financing controls in high-risk third countries

On 14 November 2022, HM Treasury published an updated version of its Money Laundering Advisory Notice: High Risk Third Countries. This follows the publication of two statements by the Financial Action Task Force in October 2022 identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

Botswana and Mauritius are no longer classed as high-risk countries for the purposes of enhanced customer due diligence requirements in Regulation 33(3) of the MLRs, whereas Jordan, Mali and Turkey remain on the list.

7. FCA: New webpage: Raising standards in new firms and financial promotions

On 22 November 2022, the FCA published a new webpage which sets out details on the new function it has created which is to assist newly authorised firms to adapt to being supervised by the FCA. It acknowledges that young start-ups can often grow quickly, which could, in turn, quickly result in consumers being affected.

The new function is called the "Early and High Growth Oversight" function and is to assist with the initial stages of a firm being authorised. The initial pilot identified that newly authorised firms were particularly struggling with the FCA's rules on financial promotions. In particular, firms were advertising ambitious investment returns that they could not back up, as well as advertising services that the FCA had not authorised the firm to provide. Phase 2 of the pilot has since been launched and aims to identify other areas where firms frequently require assistance.

8. FCA: Discussion Paper DP22/5: Big Tech entry in the retail services sector

In October 2022, the FCA published a Discussion Paper (DP 22/5) regarding the potential competition impacts of Big Tech entry and expansion in retail financial services.

Although the increasing presence of Big Tech firms such as Facebook (Meta), Google (Alphabet), Apple and Amazon can bring benefits to retail financial service consumers by promoting innovative and efficient services, there are also competition risks which the FCA is interested in evaluating. The Discussion Paper aims to promote discussions on how the expansion of Big Tech firms will impact stakeholders such as consumers, smaller challenger firms (including fintech firms), trade bodies of regulated firms and groups representing consumers' interests.

The Discussion Paper is focused on four retail sectors: payments, deposit taking, consumer credit and insurance, which are summarised below.

• Payments: Big Tech firms’ existing innovations in payments have already brought convenience and security benefits to consumers. Further expansion could increase competition across the card scheme value chain and incentivise lower prices, higher quality and innovation from the scheme operators themselves. However, competition risks may arise where Big Tech firms have market power, reducing incentives to innovate, improve quality, and lower prices, as well as the ability to engage in anti competitive behaviour.
• Deposit Taking: being a regulated deposit taker is a more significant, costly, and therefore riskier entry strategy than entering into the financial services market as an e-money firm, (which would already offer many of the same payment integration and ecosystem benefits). As a result, the FCA considers it less likely that a Big Tech firm will offer personal current accounts, at least until it has an established e-money presence first.
• Consumer Credit: in the short term, Big Tech firms’ entry into the consumer credit market could put competitive pressure on existing credit providers to lower prices and improve quality by lowering search and switching costs, or by directly providing innovative credit products. However, in the long term, a competition risk may emerge if the market evolved such that a Big Tech firm controlled access to a significant share of credit consumers or their credit risk and affordability assessments.
• Insurance: in the short term, there may be positive spill-over effects and creation of new distribution channels for insurance products. However, in the long term a competition risk may emerge if the data gathered by Big Tech firms and used in insurance underwriting to reduce access to insurance for certain cohorts of consumers.

The FCA intends to publish a feedback statement in the first half of 2023.

For further details, please see our briefing.

9. Bank of England: Speech by Jon Cunliffe: DeFi, digital currencies and regulation

On 21 November 2022, the Bank of England issued a speech by Jon Cunliffe, Deputy Governor, referencing the ongoing turmoil in the cryptoassets sector and providing an overview of work the Bank is undertaking with HM Treasury and the FCA on the regulation of cryptoassets in general, and work on a potential central bank digital currency. Key areas addressed in the speech include:

•  transparency in corporate structures and the relationships between them are key foundations for regulating conflicts of interests
•  the "same risk, same regulatory outcome" should be the guiding principle for determining how regulation should apply to the cryptoassets sector;
• the Financial Services and Markets Bill 2022-23 will extend the current regulatory regimes for e-money and payment systems to cover stablecoins used for payments;
• the Bank intends to publish a consultation in early 2023 on the regulatory framework applicable to systemic payment systems and the services that accompany them. This would cover how coinholders’ claims on a stablecoin issuer and wallets should be structured to deliver redemption at par and how the backing assets should be managed; and
• the Bank and HM Treasury plan to issue a consultative report on potentially issuing a digitally native pound sterling later in 2022.

10. HM Treasury: MOU: UK and Singapore Collaboration in FinTech

On 25 November 2022, the UK and Singapore agreed on a Memorandum of Understanding (MoU) regarding the UK-Singapore FinTech Bridge to remove barriers to fintech trade and boost cooperation. This is intended to deepen engagement between businesses and regulators, adding to previous co-operation such as the UK Singapore Financial Partnership agreed in 2021. Policymakers from both the UK and Singapore will also meet regularly with the FinTech sector to work on removing regulatory barriers to trade.

The key objectives of the MoU are to:

• enable close and stronger collaboration between the UK and Singapore through the establishment of a new structured engagement regarding the Fintech industry and market in both jurisdictions;
• provide a formalised framework for on-going cooperation between the participants on FinTech issues, covering policy to policy and business to business (including trade and investment) engagement;
• recognise the on-going regulator to regulator engagement on FinTech issues between the FCA and the Monetary Authority of Singapore;
• highlight the facilities and assistance available to FinTech firms in each jurisdiction to explore new business opportunities;
• provide opportunities to discuss ways to improve available support and reduce barriers to entry in both jurisdictions; and
• facilitate future discussions covering the joint promotion of the FinTech Bridge and further innovation in financial services.

11. FCA: Speech by Nikhil Rathi: Rolling Regulation Forwards

On 16 November 2022, the FCA published a speech given by Nikhil Rathi, Chief Executive of the FCA. He stated that the FCA is keen to work alongside industry to use the consumer duty to form the base of a framework for the use of new technologies such as AI, which could potentially assist with identifying signs of vulnerability, obtaining reliable customer data and feedback, and making products tailored to individuals. He emphasised that safe and responsible adoption of AI will always be underpinned by the quality of data, and that firms must remain accountable for this.

Mr. Rathi also stressed that taking advantage of digitalisation must be accompanied by ensuring that groups of consumers are not left behind, with a particular emphasis on those who are vulnerable or not "digitally enabled". Furthermore, the FCA is keen to work alongside industry to ensure that the UK continues to be the biggest destination for fintech investment in Europe.

12. FCA announces new ESG data and ratings Code of Conduct working group

On 22 November 2022, the FCA confirmed that it was establishing a new Working Group to develop a voluntary Code of Conduct for ESG data and ratings providers, and published the Terms of Reference for the Working Group. This development is in response to the increasing reliance placed by firms on third party ESG data and ratings services as firms integrate ESG into their activities and expand their ESG-focussed products. It follows the FCA's June 2022 Feedback Statement on ESG integration in UK capital markets, in which the FCA expressed support for plans by the UK government to bring ESG data and rating providers within the FCA regulatory perimeter.

Were its regulatory perimeter to be so expanded, the FCA would consult on a proportionate and effective regulatory regime focusing on outcomes in areas highlighted by IOSCO in its recommendations on ESG ratings and data products providers.

The International Capital Market Association and the International Regulatory Strategy Group have been appointed as the secretariat to develop the Code of Conduct. The Working Group will be co-chaired by number of bodies including the London Stock Exchange Group and will be composed of a number of stakeholders.

13. ESMA: Consultation Paper on Guidelines regarding Funds' names using ESG or sustainability-related terms

On 18 November 2022, ESMA published a Consultation Paper which provides specific guidance regarding Funds' names using ESG or sustainability-related terms. ESMA has requested feedback and comments on the Consultation Paper from stakeholders, such as AIFMs, UCITS Management Companies and institutional or retail investors investing in AIFs or UCITS.

The main proposals in the Consultation Paper include:

• where a Fund has any ESG-related words in its name, a minimum proportion of at least 80% of its investments should be used to meet the environmental or social characteristics or sustainable investment objectives;
• where a Fund name includes the term "sustainable" (including any derivations), it should comply with the 80% requirement above but also ensure that at least 50% of the investments used to meet the environmental or social characteristics, or sustainable investment objective of the fund qualify as "sustainable investments" under the Sustainable Finance Disclosure Regulation (SFDR); and
• in order to use the term "sustainability" or other ESG-related terms in the Fund name, a Fund must also comply with the exclusions for Paris-aligned Benchmarks set out in the Benchmark Regulation Delegated Regulation.

ESMA will consider the feedback and comments it receives from the Consultation Paper by 20 February 2023.

For further details, please see our briefing.

14. ESAs: Q&A on SFDR Delegated Regulation

On 17 November 2022, the European Supervisory Authorities published a new Q&A on the SFDR Delegated Regulation, which covers:

• the "current value of all investments" in Principal Adverse Impact (PAI) and Taxonomy-aligned disclosures;
• PAI, Taxonomy-aligned investment and Financial Product disclosures;
• multi-option products; and
• financial advisers and execution-only Financial Market Participants.

15. ESAs: Call for evidence on better understanding greenwashing

On 15 November 2022, the European Supervisory Authorities (ESAs) published a Call for Evidence to better understand the key features, drivers, and risks of greenwashing, as well as examples of greenwashing in practice. The aim, given the broad use of the term "greenwashing", is to obtain a deeper understanding from stakeholders in the EU financial sector (including banking, insurance and financial markets) on greenwashing practices, to better inform policy making and supervision.

All financial institutions under the remit of the three ESAs as well as other stakeholders (i.e. retail investors, consumer associations, NGOs, academia) are invited to respond to the CfE. Contributions should focus on greenwashing risks and occurrences arising in the financial sector and affecting financial products and services under the scope of the ESAs.

Responses to the CfE are to be submitted by 10 January 2023, via the online webpage. Any contributions will feed into the ESA's findings for their progress reports due in May 2023, and the final reports due in May 2024.

16. ESAs: Six month delay to PAIs review

On 14 November 2022, a letter from the Chair of the Joint Committee of the European Supervisory Authorities (ESAs) addressed to the relevant Director General of the European Commission (dated 26 October 2022) was published. The ESAs anticipate a delay of up to six months to their review of the indicators for principal adverse impact and the financial product disclosures within the Sustainable Finance Disclosure Regulation. The review is now expected by 28 October 2023. The letter outlines reasons for the extension, mainly the complexity of the technical aspects and the requirement for various agencies and expert bodies to provide input.

No updates for this edition of the FSS.

17. FCA: Speech by Sheldon Mills: Diversity and inclusion, driving change in financial services

On 22 November 2022, the FCA issued a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition in relation to Diversity and Inclusion (D&I) in the financial services sector. D&I should be understood as the internal representation within organisations and having sufficient knowledge and understanding to be able to serve a diverse society well, and Mr Mills noted that D&I extends beyond race and gender.

Mr Mills states that encouraging a more diverse and inclusive financial services industry is a core part of the objectives outlined in the FCA's Business Plan for 2022-2023, and confirmed that the FCA is planning to publish a D&I Consultation Paper in 2023.

The FCA considers that diversity and inclusion strategies are crucial to focusing minds and driving action at all levels of an organisation, and that data is the cornerstone of an effective D&I strategy. Leadership and visibility are important, but building and developing a sustainable diverse talent pipeline from the point of recruitment and through the organisation to leadership is also significant. Data shows that diverse representation falls markedly between junior and middle-management levels, and it is important for financial services firms to take a holistic view of diverse talent development and succession planning.

Mr Mills also opined that firms cannot rely solely on staff surveys to measure inclusion. Building a healthy and resilient culture is not an overnight process but requires consistent and focused action over time. Firms should consider the practical steps they can take to address the fundamental aspects of inclusivity, such as the welcoming of different perspectives if they want to make progress.