Includes developments in relation to: artificial intelligence; operational resilience; Financial Services and Markets Bill 2022-23; Prudential and Resolution Policy Index; IDD; and financial crime control failings
Click on the headings below to access each section:
Issue 1169 / 21 July 2022
- European Commission
- UK Government
- HM Treasury
- Bank of England and Financial Conduct Authority
- Prudential Regulation Authority and Financial Conduct Authority
- Prudential Regulation Authority and Financial Services Compensation Scheme
- Financial Conduct Authority
- Financial Regulators Complaints Commissioner
- Financial Markets Standards Board
EU Taxonomy Complementary Climate Delegated Act covering certain nuclear and gas activities - published in OJ - 15 July 2022
Commission Delegated Regulation (EU) 2022/1214 has been published in the Official Journal of the European Union. This Delegated Regulation amends Commission Delegated Regulation (EU) 2021/2139 on economic activities in certain energy sectors and Commission Delegated Regulation (EU) 2021/2178 on specific public disclosures for those economic activities, and is referred to as the Complementary Climate Delegated Act (the Act).
The Act specifies the conditions for labelling nuclear and natural gas energy activities as environmentally sustainable for the purposes of the EU Taxonomy Regulation ((EU) 2020/852). The inclusion of gas and nuclear activities in this context has been controversial; in January 2022, the Platform on Sustainable Finance expressed significant concerns in its feedback on the Commission's early draft text of the Act.
The Act also introduces specific disclosure requirements for large listed non-financial and financial companies to disclose the proportion of their activities linked to natural gas and nuclear energy.
It will enter into force on 4 August 2022 and will apply from 1 January 2023.
Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities
Artificial Intelligence - Government publishes National AI strategy - 20 July 2022
The UK Government has published a policy paper (the Paper) setting out proposals on future regulation of artificial intelligence (AI), proposing what it sees as a less centralised approach than the EU. The publication of the Paper coincides with the introduction of the Data Protection and Digital Information Bill.
The approach set out in the Paper is based on six core principles that regulators such as the FCA (as well as Ofcom and the Competition and Markets Authority) must apply, with the flexibility to implement these in ways that best meet the use of AI in their respective sectors. In this way, the government has emphasised that it is allowing different regulators to take a tailored approach to the use of AI in a range of settings.
The core principles require developers and users to:
- ensure that AI is used safely;
- ensure that AI is technically secure and functions as designed;
- make sure that AI is appropriately transparent and explainable;
- consider fairness;
- identify a legal person to be responsible for AI; and
- clarify routes to redress or contestability.
The government has invited industry experts, academics and civil society organisations focusing on this technology to share their views on putting this approach into practice through a call for evidence. The government will consider responses alongside further development of the framework in the forthcoming AI White Paper which will explore putting the principles into practice.
Alongside the Paper, the government published the first AI Action Plan to show how it is delivering against the National AI Strategy and identify new priorities for the year ahead.
Priorities for the financial services sector and scope of Financial Services and Markets Bill 2022-23 - Mansion House speech delivered by the Chancellor - 19 July 2022
HM Treasury has published a speech delivered by the Chancellor of the Exchequer, Nadim Zahawi, at the Mansion House. Among other things, Mr Zahawi considered the government’s vision for financial services and the introduction of the Financial Services and Markets Bill (the Bill), which he describes as a:
“landmark piece of legislation… that gives us the tools we need to seize the opportunities of Brexit and create a safer, better system for consumers.”
He noted that:
“[t]he Bill implements the outcomes of the Future Regulatory Framework Review. I can announce today that we will repeal hundreds of pieces of retained EU law. UK financial regulation will once again be decided in the United Kingdom, for the United Kingdom, by the UK’s expert, independent regulators. And, as the regulators take on new responsibilities, we will give the FCA and PRA a new, secondary objective: to facilitate growth and competitiveness.”
Mr Zahawi also referred to speculation about the government taking further powers to intervene in financial regulation, in the public interest. He stated that this is “something we're looking at” and that he is “keeping an open mind” but confirmed that no such powers are included in the Bill as introduced to Parliament because he wants “time to consider all the arguments before making such an important decision”.
See further our item on the Financial Services and Markets Bill 2022-23 in the Beyond Brexit section.
In the speech, Mr Zahawi mentioned that the government will publish a second Economic Crime Bill later in 2022, which will contain new powers to encourage better private sector information sharing. The government is also reforming regulations to attract green finance to the UK, including through the industry-led Transition Plan Taskforce, and is working to understand how distributed ledger technology could be applied to a UK sovereign debt instrument.
Digitisation Taskforce - HM Treasury publishes terms of reference - 20 July 2022
HM Treasury has published the terms of reference for a Digitisation Taskforce (the Taskforce) to drive forward the full digitisation of shareholdings. The Taskforce was launched on 19 July 2022, following the publication of Mark Austin’s review of Secondary Capital Raising in the UK, in which he made a series of recommendations (including establishing the Taskforce). That review defined digitisation in this context as ‘encompassing the eradication of paper-based processes in the securities settlement infrastructure for capital markets’.
The Taskforce will be chaired by Sir Douglas Flint (the Chair). It has been asked to:
- identify immediate, and longer term, means of improving on the current intermediated system of share ownership;
- eliminate the use of paper share certificates for traded companies and mandate the use of additional options to cheques for cash remittances; and
- consider whether the arrangements for digitisation can be extended to newly formed private companies and as an optional route for existing UK companies.
The Chair has been asked to provide a public report on the Taskforce’s progress and initial findings by spring 2023, and to publish final recommendations and an implementation plan by spring 2024.
Bank of England and Financial Conduct Authority
Data Collection Transformation Plan - Bank of England and FCA publish phase one recommendations - 21 July 2021
The Bank of England (the Bank) and the FCA have published an initial set of recommendations emerging from their ‘joint transformation programme’ which was set up in July 2021 to deliver a vision for transforming data collection so ‘that they get the data they need to fulfil their mission, at the lowest possible cost to industry’.
The joint transformation programme uses the Government Digital Service’s industry-standard Service Design Approach (the SDA) and is run in ‘phases’ with each phase being made up of a number of use cases. To date, the joint transformation programme has made seven recommendations to the Bank of England and the FCA for Form DQ and the Financial Resilience Survey.
The Bank of England and FCA have responded to the recommendations, taking into account the views of a wide range of stakeholders in both organisations, at both senior and working levels. The stakeholders in both organisations were supportive of the recommendations, which they felt provided a balanced mix of shorter term wins and longer term transformational improvements.
The recommendations and the regulators' responses to them are summarised in a table in the associated press release.
Prudential Regulation Authority and Financial Conduct Authority
Operational resilience - PRA and FCA publish joint paper on oversight of critical third parties to the UK financial sector - 21 July 2022
The FCA, PRA and the Bank of England have published a discussion paper on potential ways to manage systemic risks posed by critical third parties (CTPs) to the UK financial sector.
The discussion paper outlines potential measures for overseeing the systemic risks arising from the services CTPs provide to firms and financial market infrastructure firms (FMIs). These measures focus on material services that CTPs provide to the financial sector. The measures include:
- a framework for identifying potential CTPs, which would inform the supervisory authorities’ recommendations for formal designation by HM Treasury;
- minimum resilience standards, which would apply to the services that designated CTPs provide to firms and FMIs; and
- a framework for testing the resilience of material services that CTPs provide to firms and FMIs using a range of tools such as scenario testing, participation in sector-wide exercises, cyber resilience testing and skilled persons reviews of CTPs.
The proposed measures would complement, not replace, firms and FMIs’ existing responsibilities to manage risks from contracts with third parties. Whether or not firms and FMIs rely upon third parties to support the delivery of important business services, firms and FMIs are themselves responsible, and ultimately accountable for their operational resilience.
Responses to the discussion paper can be submitted on or before 23 December 2022.
Prudential Regulation Authority and Financial Services Compensation Scheme
PRA and FSCS - Updated MoU agreed - 15 July 2022
The PRA and the Financial Services Compensation Scheme (FSCS) have agreed a memorandum of understanding (MoU) setting out an updated framework for their cooperation. It replaces the previous version of the MoU, which was adopted in 2019.
Among other things, the MoU has been refreshed to include:
- a reference to the PRA’s secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised firms;
- a commitment by the FSCS to establish a regular programme of stress tests to verify whether its operational and funding capabilities are sufficient to ensure protection in various complex scenarios and in times of increased pressure; and
- a commitment by the FSCS, where appropriate, to enter into cooperation agreements with depositor and policyholder schemes in other jurisdictions.
The revised version also deletes references to the European Banking Authority and to non-UK firms passporting into the UK.
Financial Conduct Authority
Annual Report, Accounts and Perimeter - Reports published by FCA - 19 July 2022
The FCA has published its Annual Report and Accounts for 2021/22 (the Report). The Report demonstrates how the FCA has performed against the objectives and key priorities outlined in its 2021/22 Business Plan and includes data and statistics on a variety of topics, including on investigations and enforcement.
The Report is accompanied by a letter from Nikhil Rathi, Chief Executive, to Nadhim Zahawi, Chancellor of the Exchequer, detailing the FCA’s activities over the past year. Among other things, that letter notes that securing better outcomes for all consumers, including vulnerable customers, continues to be central to the FCA’s work, particularly given current pressures on household budgets.
Alongside the Report, the FCA has published its fourth annual report on the regulatory perimeter (the Perimeter Report), referring to a number of areas of concern, including:
- cryptoassets: the FCA expects firms to have robust anti-money laundering control frameworks to managed the increased financial crime risks associated with cryptoassets. HM Treasury is bringing forward legislation to implement the Financial Action Task Force Travel Rule, which will help ensure that the UK’s cryptoasset sector is a safe place to invest and make payments; and
- the overseas persons exclusion (OPE): the FCA is working closely with HM Treasury in preparation for a consultation to consider whether the current operation of the UK’s regime for overseas firms strikes an appropriate balance between openness and ensuring the resilience and safety of financial markets, the protection of consumers and market integrity, and the promotion of competition.
Financial Regulators Complaints Commissioner
Reviewing how the financial services regulators consider complaints - Commissioner publishes Annual Report - 19 July 2022
The Financial Regulators Complaints Commissioner has published an annual report on how the financial services regulators considered complaints during the period from 1st April 2021 to 31st March 2022 (the Report). The Commissioner dealt with 935 cases during the year, compared to 393 the previous year. This equates to an increase of approximately 137%, due in large part to 443 complaints about the FCA’s regulation of London Capital & Finance plc. The FCA Register also continues to be a significant area of concern reflected in the number and nature of complaints the Commissioner has continued to receive over the past year.
The FCA’s response to the Report notes that a number of themes identified in the Report are subject to ongoing conversations. The Bank of England’s response reiterates its commitment to the recommendation made by the Commissioner to put in place an indicative scale for ex gratia payments for distress and inconvenience caused by delays in complaints handling, as noted in the Consultation Paper CP8/20.
Financial Markets Standards Board
ESG ratings - FMSB publishes spotlight review - 20 July 2022
The Financial Markets Standards Board (FMSB) has published a spotlight review on ESG ratings, which it defines as the ‘broad spectrum of external ratings products that are marketed as providing an opinion regarding an entity, a financial instrument or a product, a company’s ESG profile or characteristics or exposure to ESG, climatic or environmental risks or impact on society and the environment that are issued using a defined ranking system or rating categories’ (the Review).
The Review considers the transparency of external ESG rating methodologies produced by third party commercial providers and data collection processes and aims to enhance user understanding and promote comparability across rating providers in wholesale financial markets. Among other things, it notes that recent regulatory publications have highlighted numerous issues with the ESG ratings market, from both rated entities and rating providers, that may impact the uses of ESG ratings, or send unclear ESG signals to market participants.
See the Beyond Brexit section for an item on the Financial Services and Markets Bill 2022-23 and an item on HM Treasury’s response to the second consultation paper relating to Phase II of its Financial Services Future Regulatory Framework Review.
Issue 1169 / 21 July 2022
- UK Parliament
- HM Treasury
- HM Treasury and The City of London Corporation
Financial Services and Markets Bill 2022-23 - Introduced to Parliament - 20 July 2022
The Financial Services and Markets Bill (the Bill) has been published and introduced to Parliament, together with explanatory notes, and has had its first reading in the House of Commons. The publication of the Bill follows the Mansion House speech, delivered by Chancellor of the Exchequer, Nadhim Zahawi, on 19 July 2022 (see further item in General section above).
The Bill makes important updates to the UK’s regulatory framework for financial services. It reflects the outcome of a number of HM Treasury initiatives, primarily its Future Regulatory Framework (FRF) Review, which was intended to address issues relating to legislation and the governance of the financial services regulators that have arisen as a consequence of Brexit. See the item below for a summary of HM Treasury’s response to the consultation on Phase II of the FRF Review.
- The Bill revokes retained EU law relating to financial services (from dates to be specified) and enables HM Treasury and the financial services regulators to replace retained EU law with rules designed specifically for UK markets, in a way that builds on the UK’s existing approach to financial services regulation.
- It enhances the UK’s existing regulatory regime by updating the objectives of the financial services regulators to ensure a greater focus on long-term growth and international competitiveness.
- The Bill seeks to secure and enhance the UK’s position as an open and global financial hub by providing for the implementation of mutual recognition agreements (MRAs) with the UK’s global partners, and for the UK to recognise equivalent Simple, Transparent and Standardised (STS) securitisations issued by entities outside of the UK;
- It brings stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment. It also enables technological innovation in financial services by allowing financial market infrastructure (FMI) firms to explore new technologies in temporary pilot schemes and reduces the risk of an incident at a third-party provider which has a systemic impact on the UK financial services sector;
- It seeks to maintain the UK’s position as a competitive marketplace with robust regulatory standards by reforming the UK’s wholesale capital markets regime; giving the Bank of England new tools to mitigate the risks of failure of critical financial institutions; enhancing the UK’s insolvency arrangements for insurers to help authorities to better manage insurers in financial distress; and creating a senior managers and certification regime for a number of types of systemically important firms, similar to the existing regime for banks, insurers and other financial services firms; and
- It introduces measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease; enabling credit unions to offer more products; introducing a regulatory gateway designed to improve the quality of financial promotions; and enhancing protection for victims of authorised push payment scams.
We note in particular that the Bill will establish the legislative framework for the revocation of all EU retained law relating to financial services and a transition to new requirements under the regime established by the Financial Services and Markets Act 200 (FSMA) (see clauses 1 to 7). Schedule 1 sets out a list of the legislative acts that will be repealed under this framework. These include all level 1 onshored EU regulation, statutory instruments that reflect the implementation of EU law, provisions made under EU directives and specified provisions in FSMA. HM Treasury does not expect to commence the revocation of individual parts of Schedule 1 unless the regulators have drafted and consulted on rules that are ready to be enforced. It expects that it will take a number of years to complete the process of revoking retained EU law.
The Bill will also amend FSMA to establish the Designated Activities Regime (DAR) to allow activities related to financial markets to be regulated within a framework that is compatible with a comprehensive FSMA model. This is intended to address the status of the regulation of certain activities, products or conduct that are regulated by retained EU law but that are not FSMA regulated activities. The legislative framework for the DAR will be set out primarily in a new Part 5A of FSMA. HM Treasury will be granted a power to designate activities relating to financial markets, exchanges, instruments, products or investments in secondary legislation, so that relevant activities can be brought inside this framework. It will also be able to set a prohibition against carrying out designated activities, or stipulate that they must take place in accordance with the relevant rules. The FCA will be granted a power to make rules in relation to designated activities within the accountability and objectives framework for financial services regulators.
The Bill is scheduled to have its second reading on 7 September 2022. Apart from certain provisions specified in clause 72, the reforms to be made by the Bill will commence on dates to be appointed by HM Treasury in statutory instruments.
Phase II of the Future Regulatory Framework Review - HM Treasury publishes response - 20 July 2022
HM Treasury has published its response to the second consultation paper relating to Phase II of its FRF Review.
The FRF Review was established to determine how the financial services regulatory framework should adapt to the UK’s new position outside of the EU and how to ensure the framework is fit for the future. It involved two consultations, previously reported in this Bulletin, in October 2020 and November 2021. The first consultation set out an overall approach to the regulation of financial services, built on the existing model under FSMA. The second set out how the government intends to repeal the majority of retained EU law relating to financial services, handing responsibility for setting the direct regulatory requirements on firms to the regulators. That consultation also set out proposals for changes to the regulators’ statutory objectives, enhanced mechanisms for accountability, scrutiny and oversight of the regulators by Parliament and HM Treasury.
In the response, HM Treasury summarises the key themes raised by respondents and sets out the government's final policy position on the reforms.
A significant majority of respondents supported the proposal to introduce new secondary growth and competitiveness objectives for the FCA and the PRA. The government will extend the FRF Review accountability arrangements to the Payments Systems Regulator (PSR), but it does not intend to modify the PSR's statutory objectives on the basis this would effectively be duplicative.
The proposed power for HM Treasury to direct the regulators to review rules where it is in the public interest was generally welcomed, although some respondents requested more clarity on when this power would be exercised.
There was broad agreement that the proposed requirement for the regulators to publish and maintain frameworks for how they review their rules will provide improved transparency to stakeholders.
The government will take powers to set ‘have regards’ that the regulators must consider when making rules in specific areas of regulation and to place obligations on the regulators to make rules in specific areas of regulation.
The government is legislating for the FRF Review reforms through the Financial Services and Markets Bill 2022-23, which was introduced to Parliament and had its first reading in the House of Commons on 20 July 2022, as noted in the item above.
See also the Securities and Markets section for an item on HM Treasury’s response to its January 2022 consultation paper on a revised regulatory framework for central counterparties (CCPs) and central securities depositories (CSDs) as part of the FRF Review.
HM Treasury and The City of London Corporation
Annual review of UK financial services - HM Treasury and the City of London Corporation publish first report - 21 July 2022
The Treasury and the City of London Corporation have published the first annual report on the attractiveness and international competitiveness of the UK financial services sector. The report compares the performance of the UK’s financial services sector to those of other major economies and identifies potential areas for reform.
Acting on Lord Hill’s recommendation in the 2021 UK Listing Review, the report aims to provide a comprehensive, evidence-based diagnostic of the state of the UK financial services sector. It is divided into chapters focused on six individual themes that represent financial services policy priorities for the UK. The policy priorities and related recommendations include:
- an open and global financial hub: the UK should remain aligned with global standards and seek outcomes-based trading relationships with global markets. It should also introduce regulation that is better tailored to its domestic markets;
- an integrated eco-system driving growth across the UK: given that the UK has a dense network of expertise and a co-location of banking, insurance, investment management, accounting, legal services, consulting and other related activities, it is hoped that a ‘common sense of purpose’ and a strong culture that identifies opportunities can be shared across government, regulators, trade associations and firms within the financial services sector;
- a once-in-a-generation opportunity to become more nimble, agile and proportionate: through the Future Regulatory Framework review and the introduction of the growth and international competitiveness secondary objective for the FCA and PRA, regulatory frameworks in the UK can stay agile, coherent and competitive, while delivering better outcomes for consumers and businesses;
- a sector at the forefront of innovation: to drive the adoption of technology across the financial services sector, scale businesses and deliver further growth, the right policy support and culture change will be required;
- a sector greening the world’s financial system: the UK should develop and strengthen a market where global participants can find the fullest spectrum of services and products; and
- a sector with access to the right talent and expertise: the UK should remain attractive to highly skilled international talent and continue to provide expertise across the economy.
The report acknowledges that the UK remains a ‘hugely successful financial centre’ and that in order to maintain this position, the government, industry and regulators ‘must continue to work collaboratively and to constructively challenge each other’.
BANKING AND FINANCE
Issue 1169 / 21 July 2022
- European Banking Authority
- UK Government
- HM Treasury
- Prudential Regulation Authority
- Payment Systems Regulator
European Banking Authority
Remuneration and high earners - EBA publishes report on benchmarking and data - 21 July 2022
The European Banking Authority (EBA) has published a report (EBA/Rep/2022/17) (the Report) on the benchmarking of remuneration practices in EU banks for the financial years 2019 and 2020 and high earners (those awarded EUR 1 million or more remuneration) data for 2020. The Report is required under mandates in Articles 75 and 94 of the Capital Requirements Directive (2013/36/EU) (CRD IV).
Overall, the EBA notes that the number of high earners fell from 1444 (EU27/EEA) or 4963 (EU28/EEA) in 2019 to 1383 (EU27/EEA) in 2020, and that, while the bonus level for high earners remained relatively stable, a visible reduction can be observed for staff whose professional activities have a material impact on the institution’s risk profile. The reduction in the number of high earners and bonuses of identified staff was, according to the report, mainly caused by the COVID-19 pandemic and is consistent with the EBA’s March 2022 recommendations to apply more conservative remuneration policies during the pandemic.
The EBA will continue to benchmark remuneration trends every two years and will publish annual data on high earners. It will also start to benchmark the application of derogations from the requirements to pay out a part of the variable remuneration in instruments and under deferral arrangements, and the gender pay gap separately for credit institutions and investment firms.
The Payment and Electronic Money Institution Insolvency (England and Wales) (Amendment) Rules 2022 - Statutory instrument and explanatory memorandum published - 20 July 2022
The Payment and Electronic Money Institution Insolvency (England and Wales) (Amendment) Rules 2022 (the Rules) have been published, together with an explanatory memorandum.
The Rules correct minor drafting errors in the rules for the special administration procedure established in The Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021 (the 2021 Rules), under the Payment and Electronic Money Institution Insolvency Regulations 2021. The Rules also delete Rule 291(1) of the 2021 Rules to avoid duplication with the Insolvency Act 1986 and to ensure consistency.
The Rules will come into force on 10 August 2022.
Payments Regulation and the Systemic Perimeter - HM Treasury publishes consultation - 21 July 2022
HM Treasury has published a consultation on Payments Regulation and the Systemic Perimeter that meets a government commitment made in the response to the 2021 ‘Payments Landscape Review’. The consultation sets out why now is the time to review the applicability of the Bank of England’s (the Bank’s) existing regulatory perimeter over payment systems, the government’s principles in approaching any reforms, and potential adjustments to the framework of the Banking Act 2009.
The consultation outlines the government’s considerations as to how the payments regulatory framework fits with the outcomes of the Future Regulatory Framework Review (see further an item in the Beyond Brexit section of this Bulletin). It also seeks views on exploring the scope of application of a Senior Managers & Certification Regime for the regulation of payments; and finally, changes to the current regulatory framework of the Payment Systems Regulator, as set out in the Financial Services (Banking Reform) Act 2013.
A number of other topics are explored, including the rationale for expanding the Bank’s supervision of systemic risk relating to payments beyond payment systems and associated service providers and the principles the government would apply to any reforms of the Bank’s regulatory responsibility for systemic payments activities, namely that of ‘same risk, same regulatory outcome’. The consultation also considers what an amended regulatory perimeter would involve for regulating risk end-to-end throughout the payment chain; what criteria would apply to recognising new entities; and the continued role for HM Treasury in determining which entities fall within the systemic regulatory regime.
Of particular note is the commentary on location requirements for firms that actively market stablecoins used as a means of payment to UK consumers and the indication from government that it:
“is minded not to create an automatic or ex ante location requirement for an entity recognised under the Banking Act to be established in the UK, but to clarify in the legislation that the Bank has the ability to apply such a requirement where it deems this necessary as part of its role in overseeing the risk posed by a particular recognised entity’s operations”.
The consultation also refers to the fact that, although for the most part payment services and e-money institutions who carry out, or intend to carry out, part of their business in the UK must establish (i.e. have a head office) in the UK, this is not the case for authorised electronic money institutions (EMIs) and regulated account information service providers (RAISPs) which may operate via only a branch presence in the UK. The government therefore welcomes evidence about the regulatory differences in the establishment requirements for different types of payment services and e-money firms, or if there are justifiable reasons for differentiating between these requirements.
The government will respond to this consultation in 2023 after receiving and reflecting on stakeholder feedback.
Prudential Regulation Authority
Unvested pay, material risk takers and public appointments - PRA publishes Consultation Paper (CP8/22) - 15 July 2022
The PRA has published a Consultation Paper (CP8/22) on its supervisory expectations in respect of changes to the instruments or claims that comprise unvested, deferred sums awarded to Material Risk Takers (MRTs) as part of their variable pay. It considers, in particular, cases where a change is prompted by the need to manage a conflict of interest arising from an MRT seeking a senior public appointment linked to financial policy or financial services regulation.
The proposals would result in changes being made to PRA Supervisory Statement SS2/17 (‘Remuneration’). More specifically, they would create an expectation that firms should not ordinarily convert unvested, deferred pay awards to MRTs from equity to other instruments (or vice versa). However, the PRA considers there may be circumstances, notably seeking to address a conflict of interest that might arise from a public-sector appointment, where conversion might occur subject to the PRA’s prior non-objection. It is proposed that SS2/17 also be amended to outline the circumstances in which the PRA considers it more likely that a waiver or modification to its rules would meet the relevant statutory test where, in wholly exceptional circumstances, an adjustment is sought in relation to a public-sector appointment with a view to converting an award comprising equity or other instruments to a cash sum. In such cases, it is envisaged that such a conversion would be subject to contractual terms that ensured the discipline inherent in the PRA’s remuneration rules was maintained.
The proposed addition to SS2/17 would clarify that conversion from one instrument to another should not occur if this could undermine the PRA’s objective to promote the safety and soundness of firms by aligning the long-term interests of MRTs with the long-term interests of firms.
The deadline for responses is 19 September 2022. The PRA intends to implement the changes to SS2/17 on 12 December 2022.
Prudential and Resolution Policy Index - launched by the PRA - 19 July 2022
The PRA has launched its Prudential and Resolution Policy Index (the Index), which provides a list of, and links to, policies relating to the prudential regulation of financial services firms and firms in scope of the UK resolution regime.
The PRA has published a survey for users to submit feedback and suggestions on the Index.
Risks and challenges for investment banks - PRA publishes speech - 20 July 2022
The PRA has published a speech delivered by Nathanaël Benjamin, PRA Executive Director, Authorisations, Regulatory Technology, and International Supervision, discussing the risks and challenges for investment banks caused by geopolitical and macroeconomic changes, new technology, and climate change.
Mr Benjamin notes that the biggest risk to investment banks is from the aggregate exposures of their clients. The PRA has seen banks’ counterparty risk concentrations not appropriately identified or controlled. He stresses that risk concentration should be assessed on a client-by-client basis, across all clients combined, across the client’s market-wide portfolio, and that the onus is on firms to demand this information from clients.
Mr Benjamin also cautions that established banks must not let commercial pressure to adopt new technologies or enter digital asset markets get in the way of first ensuring that they can properly understand and manage the associated risks. Banks should use the PRA’s operational resilience expectations to inform technology investment decisions and frontload the implementation of their operational resilience policy.
Mr Benjamin concludes by discussing climate change, noting that it is important for firms to take action now to prepare for future climate events. Investment banks should think about how counterparties might be exposed to climate risk, and as data becomes more readily available, the PRA expects firms to further develop their risk management and scenario analysis capabilities. Mr Benjamin also highlights lessons learned from the Bank of England’s recent Climate Biennial Exploratory Scenario, explaining that they provide a strong incentive for firms to embed the management of climate-related financial risks and to meet the PRA’s broader expectations set out in Supervisory Statement SS3/19.
Payment Systems Regulator
Digital Payments Initiative - PSR publishes response to PSR Panel report - 21 July 2022
The Payment Systems Regulator (PSR) has published its response to the PSR Panel’s report (the Report) on the PSR’s Digital Payments Initiative (the Initiative), which was published in May 2022. The Initiative was launched last year by the PSR to understand potential barriers to the take-up of digital payments, and to identify potential solutions and appropriate regulatory actions.
Overall, the PSR welcomes the Report’s recommendations. A key element of the PSR’s five-year strategy and current work programme is unlocking the potential of interbank payment systems, including by considering the potential benefits of open banking. A new Joint Regulatory Oversight Committee (the Committee) will consider the vision and strategic roadmap for further developing open banking. The PSR is keen to work with industry and other key stakeholders through a strategic working group (SWG), and has asked that the SWG recommend to the Committee how the PSR’s four priority issues can be addressed: (i) the system’s functional capability; (ii) dispute processes; (iii) access and reliability; and (iv) a sustainable funding model. The PSR, FCA and HM Treasury are working on proposals for a permanent future regulatory framework for open banking, based on joint regulatory oversight by the PSR and FCA, and backed by any necessary legislation.
The PSR explains that tackling the causes of digital exclusion lies beyond its remit but intends to explore with consumer representatives what more card and other payment system operators could do to facilitate the availability and use of digital payment services that meet the needs of those with limited digital and financial access or skills.
SECURITIES AND MARKETS
Issue 1169 / 21 July 2022
- European Securities and Markets Authority
- CRA Regulation - ESMA publishes final report on Guidelines and Recommendations on scope-15 July 2022
- MiFID II/MiFIR - ESMA updates Q&As on market structures and transparency-15 July 2022
- CCP supervision - ESMA publishes annual peer review report-19 July 2022
- SFTR and MiFIR - ESMA updates Q&As on data reporting-19 July 2022
- UCITS Directive and AIFMD - ESMA updates Q&As on application - 20 July 2022
- HM Treasury
European Securities and Markets Authority
CRA Regulation - ESMA publishes final report on Guidelines and Recommendations on scope - 15 July 2022
The European Securities and Markets Authority (ESMA) has published a final report (ESMA80-196-6345) (the Report) on revisions to its Guidelines and Recommendations on the scope of the Credit Ratings Agencies Regulation (1060/2009/EC) (CRA Regulation), originally published in 2013 (the 2013 Guidelines). ESMA consulted on the revisions in January 2022.
Respondents to the consultation were broadly supportive of ESMA’s objectives to expand on the existing regulatory provisions on private credit ratings. ESMA is therefore proceeding with the revisions as consulted on, with minor clarifications, including that:
- a private credit rating agreement should include a provision indicating the exclusive issuance of the rating to the person who placed the order. This person should sign a non-disclosure undertaking, precluding the dissemination of the rating to more than a limited number of third parties; and
- the receiving party should only share the private credit rating on a confidential basis and with a selected and definite number of natural and legal persons, limited to 150 persons. The rating providers should implement appropriate controls to monitor the distribution limit of the private credit rating.
The revised paragraphs 14 and 15 of the 2013 Guidelines will be translated into all official languages of the EU and will be published on ESMA’s website. ESMA will consider the revised 2013 Guidelines for the purposes of its supervision 18 months after their publication.
MiFID II/MiFIR - ESMA updates Q&As on market structures and transparency - 15 July 2022
ESMA has published an updated version of its Q&As on market structure issues and transparency topics under the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR).
The revised version introduces the two new Q&As relating to algorithmic trading.
CCP supervision - ESMA publishes annual peer review report - 19 July 2022
ESMA has published its annual peer review report (ESMA91-372-2064) (the Report), dated 4 July 2022, on the supervision of EU central counterparties (CCPs) by national competent authorities (NCAs) under Article 21 of the European Market Infrastructure Regulation (648/2012/EU) (EMIR). The Report focuses on the effectiveness of NCAs’ assessment of CCPs’ compliance with EMIR requirements on business continuity, in particular in remote access mode.
Although ESMA makes a range of recommendations, overall the Report finds that NCAs’ practices broadly meet the supervisory expectations. It also identifies best practices and considerations to enhance supervisory convergence.
SFTR and MiFIR - ESMA updates Q&As on data reporting - 19 July 2022
ESMA has updated its Q&As on complying with data reporting requirements under:
- the Securities Financing Transactions Regulation ((EU) 2015/2365) (SFTR) to include new questions on the construction of a trade state report and the reporting of valuation and collateral on the final day of a transaction; and
- the Markets in Financial Instruments Regulation (600/2014/EU) (MiFIR) to include new questions on reporting emission allowances.
UCITS Directive and AIFMD - ESMA updates Q&As on application - 20 July 2022
ESMA has updated its Q&As on the application of the Directive relating to undertakings for collective investment in transferable securities (UCITS) (2009/65/EC) (UCITS Directive) and its Q&As on the application of Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) with questions on the frequency of reconciliations.
Future Regulatory Framework for CCPs and CSDs – HM Treasury responds to consultation - 20 July 2022
HM Treasury has published a response to its January 2022 consultation on a revised regulatory framework for central counterparties (CCPs) and central securities depositories (CSDs) as part of its ongoing Future Regulatory Framework (FRF) Review (see item in the Beyond Brexit section).
In the response, HM Treasury summarises the key themes raised by respondents to the consultation and outlines the proposals it intends to take forward, which include the following:
- giving the Bank of England (the Bank) a general rule-making power so it can set direct requirements on the CCPs and CSDs it regulates (subject to consultation and a range of accountability measures);
- power for the Bank to impose requirements on individual CCPs and CSDs, to advance its objective to protect and enhance UK financial stability;
- establishing the concept of a ‘systemic third country CCP’ so the Bank may subject systemically-important third country CCPs to direct UK regulation and oversight. It will also be able to apply its rulebook for domestic CCPs, in whole or part, to these CCPs;
- a new secondary objective for the Bank on innovation;
- a new power for HM Treasury to be able to set points to which the Bank must ‘have regards’ when making rules in specific areas of regulation, as well as power to place obligations on the BoE to make rules in specific areas of regulation; and
- placing the bank’s FMI Board on a statutory footing.
The Bank will also be required to report annually on the efforts it has made to engage with stakeholders outside its direct regulation, such as users of CCP and CSD services, and to provide a summary of this engagement.
The government is legislating for these reforms through the Financial Services and Markets Bill 2022-23, so its final policy is set out in the Bill and the accompanying impact assessment and explanatory notes. As noted in the relevant item above, the Bill was introduced to Parliament and had its first reading in the House of Commons on 20 July 2022.
See also the Beyond Brexit section for an item summarising the Financial Services and Markets Bill 2022-23, which contains reforms to the regulatory framework for the supervision of CCPs and CSDs.
Issue 1169 / 21 July 2022
- UK Government
- HM Treasury
Dormant Assets Scheme - DCMS publishes consultation on funding - 16 July 2022
The Department for Digital, Culture, Media & Sport (DCMS) has published a consultation seeking views on what social and environmental causes should benefit from more than £700 million of dormant assets funding in England. Currently, dormant assets funding in England is required to be spent on three causes: youth, financial inclusion and social investment. The Government is now reviewing whether these remain the right causes to which funding from dormant assets should be allocated.
The Dormant Assets Scheme enables unclaimed funds to be reinvested for the benefit of social or environmental purposes, while protecting the rights of the individual customer. The Scheme was recently expanded from bank accounts to include the insurance and pensions, investment and wealth management, and securities sectors, through The Dormant Assets Act 2022, published on 1 March 2022.
The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022 - Statutory instrument and explanatory memorandum published - 19 July 2022
The Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022 (the Regulations) have been published, together with an explanatory memorandum.
The Regulations make consequential amendments to the Financial Services Act 2021, following the introduction of the Investment Firms Prudential Regime (IFPR) and Basel III standards on 1 January 2022. These include:
- repealing the Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014;
- making transitional provision in respect of risk retention requirements for certain securitisations following the implementation of the IFPR. These requirements relate to the retention of a material net economic interest in a securitisation by the originator, sponsor or original lender to better align their interests with those of investors;
- making amendments to ensure that short-term liabilities owed to both PRA- and FCA-regulated investment firms with permission to underwrite or deal on own account will continue to be exempt from bail-in; and
- addressing further deficiencies arising from the UK’s withdrawal from the EU.
The Regulations will come into force on 17 August 2022.
Issue 1169 / 21 July 2022
- European Insurance and Occupational Pensions Authority
- UK Government and Pensions Dashboards Programme
European Insurance and Occupational Pensions Authority
Peer review on outsourcing - EIOPA publishes report - 19 July 2022
The European Insurance and Occupational Pensions Authority (EIOPA) has published a report (dated 22 June 2022) (EIOPA-BoS-22/383) following its peer review on outsourcing. The peer review considered the application and supervision by national supervisory authorities (NSAs) of the relevant regulatory provisions and guidelines related to outsourcing covering the period between 1 January 2016 and 31 December 2020.
The report suggests that EU undertakings are making increasing use of outsourcing, mainly in the field of technology, and that the level of outsourcing varies greatly across the EEA. These differences in the penetration of outsourcing help explain why member states' supervisory frameworks are also at different stages of maturity.
The peer review identified several areas for improvements to the outsourcing framework and outsourcing supervisory practices including among other things the supervision of shared services providers in cases of intra-group outsourcing and the provision of personnel as a form of outsourcing.
IDD - EIOPA publishes guidance and feedback statement on integration of sustainability preferences - 20 July 2022
EIOPA has published guidance (EIOPA-BOS-22-391) on integrating customers’ sustainability preferences in the suitability assessment under the Insurance Distribution Directive ((EU) 2016/97) (IDD). The guidance follows EIOPA’s April 2022 consultation on draft Guidelines on integrating sustainability preferences.
The guidance aims to help national competent authorities (NCAs) and firms implement the changes introduced to the IDD regime by Commission Delegated Regulation (EU) 2021/1257. From 2 August 2022, firms must integrate their customers’ sustainability preferences into the sales process when they provide advice on insurance-based investment products. EIOPA stresses that the guidance is not binding and should not be considered as guidelines or a supervisory convergence tool.
In the accompanying feedback statement, EIOPA notes that it is pausing its work on the draft Guidelines and is instead publishing the guidance to promote better understanding of the new rules coming into effect.
Various respondents to EIOPA’s earlier consultation noted that a lack of data makes it difficult for intermediaries to have investment products on offer which would match sustainability preferences. Respondents also raise concerns about the impact of a misalignment between the application of the new IDD rules and that of the Commission Delegated Regulation under the Sustainable Finance Disclosure Regulation ((EU) 2019/2088), which requests that NCAs allow for a phased-in approach to the inclusion of sustainability preferences.
UK Government and Pensions Dashboards Programme
Pensions dashboards - Policies underpinning draft Regulations, standards and guidance published - 15 and 19 July 2022
The Department for Work and Pensions (DWP) has published a summary of the key policies underpinning the draft Pensions Dashboards Regulations 2022 (the draft Regulations). The key policies follow the government’s response to the January 2022 consultation on the draft Regulations. The draft Regulations set out the requirements to be met by pensions dashboard service providers and by trustees or managers of relevant occupational pension schemes in Great Britain.
The revised draft Regulations have not been made available. The DWP notes that the Regulations will be laid before Parliament at a later date, subject to parliamentary timetabling.
Separately, the Pensions Dashboards Programme (PDP) has published a consultation on draft pensions dashboards standards and guidance (the draft Standards). These set out the technical and operational detail underpinning the pensions dashboards ecosystem. They specify mandatory requirements on qualifying pensions dashboard service (QPDS) and pension providers (both DWP- and FCA-regulated), detailing how they must meet the duties set out in DWP legislation and FCA rules in practice. Operating as a QPDS will be an FCA regulated activity under legislation to be introduced by HM Treasury in due course. The FCA will also introduce QPDS Conduct of Business rules, which will be subject to a separate consultation.
The PDP has also published a call for input on design standards aimed at prospective QPDS providers, which will set out requirements for presentation of the pensions data on dashboards and design of the dashboards. A further consultation will take place on the design standards in autumn 2022.
The deadline for responses is 30 August 2022. The new legislative framework will be in place from April 2023.
Issue 1169 / 21 July 2022
- Financial Action Task Force
Financial Action Task Force
Data protection, technology and private sector information sharing - FATF publishes report - 20 July 2022
The Financial Action Task Force (FATF) has published a non-binding report on partnering in the fight against financial crime (the Report), which focuses on data protection, technology and private sector information sharing. The Report complements the FATF’s July 2021 Stocktake on ‘Data Pooling, Collaborative Analytics and Data Protection’, which highlights the need for greater regulatory clarity, promotion of enabling environments, data standardisation and governance, and bias prevention in artificial intelligence for more effective anti-money laundering (AML), countering the financing of terrorism (CFT) and counter-proliferation financing (CPF) information sharing within an appropriate data protection and privacy (DPP) framework, both internationally and nationally.
The Report sets out recommendations designed to help jurisdictions responsibly enhance, design and implement information collaboration initiatives among private sector entities, in accordance with DPP rules, so that the risks associated with increased sharing of personal data are appropriately taken into account. The Report also considers global AML/CFT/CPF requirements, and how responsible private-to-private collaboration can contribute to their effective implementation. It also introduces the DPP principles and objectives that stakeholders should (or must) consider when designing private sector collaboration initiatives.
The FATF recognises that there is no one-size-fits-all solution that addresses all AML/CFT/CPF and DPP objectives for all financial institutions globally.
See also the Enforcement section for an item on an FCA Final Notice relating to financial crime control failings.
Issue 1169 / 21 July 2022
- Financial Conduct Authority
Financial Conduct Authority
Financial crime control failings - FCA publishes Final Notice - 15 July 2022
The FCA has published a final notice with respect to The TJM Partnership Limited (formerly known as Neovision Global Capital Limited) (in liquidation) (TJM) and has fined it £2,038,700 for failing to ensure it had effective systems and controls to identify and reduce the risk of financial crime and money laundering in its business.
TJM qualified for a 30% discount to the fine under the FCA’s executive settlement procedures.