Financial Services SpeedRead: 4 October 2023 edition

Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets

1. EU Commission: Crowdfunding Regulation: Commission Delegated Regulation (EU) supplementing Regulation (EU) 2020/1503

On 29 September 2023, the EU Commission published the Commission Delegated Regulation (EU) supplementing Regulation (EU) 2020/1503 of the European Parliament and of the Council, in relation to draft technical standards specifying requirements on credit scoring of crowdfunding projects, pricing and crowdfunding offers and risk management policies and procedures.

The draft technical standards specify, amongst other things, the information and/or factors that crowdfunding service providers must:

• disclose to investors regarding the methods they use to calculate the credit score for crowdfunding projects;
• consider to ensure fair and appropriate pricing of the loans that they facilitate on their platforms;
• consider when assessing the credit risk for a crowdfunding project or project owner; and
• consider when conducting a loan valuation at different points in the life cycle of the loan.

The standards also set out certain governance arrangements that must be in place, which need to be proportionate to the size and complexity of the crowdfunding service provider.

The Commission Delegated Regulation will come into force on the 20th day following publication in the Official Journal of the European Union.

2. FCA: Investment Firms Prudential Regime (Amendment) Instrument and Technical Standards (Markets in Financial Instruments Transparency) (No 2) Instrument, 2023

On 29 September 2023, the FCA published Handbook Notice 112 (Notice) which provides an overview of various changes that have been made to the FCA Handbook through legislation.

The Notice covers in particular changes to how firms calculate the own funds threshold requirement and the liquid asset threshold requirement, which have been introduced by the Investment Firms Prudential Regime (Amendment) Instrument 2023. These changes are aimed at ensuring firms are adequately resourced and resilient, and in turn ensure the integrity of the UK financial system.

Separately, the Notice also details the deferral for transactions in exchange-traded funds priced at net asset value that has been made to Commission Delegated Regulation (EU) 2017/587 by the Technical Standards (Markets in Financial Instruments Transparency) (No 2) Instrument 2023. This change is targeted at streamlining post-trade transparency reporting and reducing operational burden.

3. ESMA: Publication: 2024 Annual work programme

On 28 September 2023, the European Securities and Markets Authority (ESMA) published its annual work programme for 2024. The programme highlights ESMA's key work and responsibilities for 2024 within the EU's current market context of high inflation, increased geopolitical risk and accelerated technological advances. ESMA has identified the following six strategic priorities and thematic drivers:

• effective markets and financial stability;
• effective supervision;
• retail investor protection;
• sustainable finance;
• technological innovation; and
• effective use of data and information and communications technologies.

4. FCA: Survey: Financial Resilience Survey

On 21 September 2023, the FCA updated its webpage on the financial resilience survey, to confirm that the survey will be emailed to a number of solo-regulated firms over the course of October 2023 and, if selected, is mandatory to complete. Firms in the Temporary Permissions Regime and Supervisory Run-off Regime can also expect to receive the same survey. This survey is intended to help the FCA understand how the current financial climate is impacting solo-regulated firms and give the FCA an accurate overview of their financial resilience.

5. ESAs: Report: Joint Committee report on risks and vulnerabilities in the EU financial system (JC 2023 44)

On 18 September 2023, the Joint Committee of the European Supervisory Authorities (ESAs) published its Autumn 2023 Report on the risks and vulnerabilities in the EU financial system.

The report highlights the continued high economic uncertainty of the EU economy and calls for vigilance from all financial market participants.

In particular, the Joint Committee advises that the ESAs, national competent authorities, financial institutions and other market participants should focus on effective risk management and governance, including by taking certain policy actions, such as:

• closely monitoring the impact of sharp increases in policy interest rates, inflation risk and risk premia; and
• remaining prepared for a decline in asset quality in the financial sector, which should continue to be monitored by supervisors along with loan loss provisioning.

Banking and Prudential

6. HM Treasury and PRA: Consultation Papers: Near-term bank ring-fencing reforms and responses to Call for Evidence

On 28 September 2023, HM Treasury and the PRA each published consultation papers on the near-term reforms intended to improve the functionality of the bank ring-fencing regime. On the same day, HM Treasury also published a summary of responses to its Call For Evidence on aligning bank ring-fencing and resolution regimes (which was requested on 7 March 2023 – see our 15 March 2023 Speedread).

In HM Treasury's consultation paper, specific proposals are set out for implementing the near-term reforms, along with new proposals to facilitate investment by ring-fenced banks (RFBs) in UK SMEs. Along with the consultation paper, HM Treasury has published a draft version of the statutory instrument that would make the relevant amendments to the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 and the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014. The consultation paper details HM Treasury's proposals to make reforms in a number of areas, including the ring-fencing thresholds, geographical restrictions applicable to RFBs and the products and services which RFBs will be permitted to engage in. Responses to the consultation are invited by 26 November 2023.

In the responses to HM Treasury's Call for Evidence, HM Treasury found limited evidence and a broad, mixed, range of views on: a) the ongoing benefits that ring-fencing provides to financial stability not found elsewhere in the regulatory framework; and b) the options for aligning the ring fencing and resolution regimes. The government will set out publicly its policy response to the Call for Evidence and any proposals for further reform regarding the longer-term future of ring-fencing in the first half of 2024.

The PRA's consultation paper (CP20/23) sets out its proposed rule and policy updates in relation to the establishment and maintenance by RFBs of third-country branches and subsidiaries outside the UK or EEA. The PRA invites feedback on the proposals by 27 November 2023. The PRA's review of the ring-fencing rules, which is statutorily required to be completed by 31 December 2023, will not impact the outcome of the proposals of the consultation paper.

7. FCA: Report: UK Payment Accounts: access and closures

On 19 September 2023, the FCA published a report setting out its initial findings following an August 2023 data request to 34 banks and building societies regarding the scale and reasons for account closures. The report is accompanied by a letter to the Chancellor detailing the principal findings of the FCA and next steps, as well as a review of how other jurisdictions have approached the issue of de-risking in the financial system.

The FCA intends to carry out further work relating to bank account closures, including in relation to account closure due to reputational risk, however the data collection exercise has provided the FCA with preliminary insights regarding the rate at which accounts are being declined, suspended or terminated.

The FCA came to the following two conclusions from the data collected:

• there was no data suggesting that accounts have been closed due to political beliefs or views lawfully expressed by accountholders, with eight firms confirming that they do not take such action; and
• the most common reason for declining, suspending or terminating an account was given by firms as due to accountholder inactivity/dormancy or because of concerns about financial crime.

The FCA expects credit institutions and payment firms to draw on the findings in the report and reflect on actions they should take, in particular by considering their obligations under the Consumer Duty to measure consumer outcomes and determine whether distinct groups of customers are receiving worse outcomes.

Fund Management

8. FCA: New webpage: Landing slots for funds in temporary marketing permissions regime

On 19 September 2023, the FCA published a new webpage announcing that it will contact fund operators over the coming months about landing slots for exiting the temporary marketing permissions regime (TMPR).

Operators of Undertakings for Collective Investment in Transferable Securities in the TMPR should check the FCA Register to ensure that their contact email address is correct.

The FCA is still reviewing the process of exiting the TMPR and notification of landing slots.

Senior Managers and Governance

9. FCA and PRA: Consultation Papers: Diversity and inclusion in the financial sector (CP23/20 and CP18/23)

On 25 September 2023, the FCA and PRA each published a consultation paper (CP23/20 and CP18/23) setting out their proposals on diversity and inclusion in the financial sector. The aim of the proposals is to deliver better outcomes for customers and markets by ensuring healthy work cultures, reducing groupthink and unlocking talent.

Firms should pay particular attention to the proposed changes to the FCA conduct rules and fitness and propriety, and consider how this will affect the position firms should adopt with respect to non-financial misconduct.

For more information, see our briefing here.

Financial Crime

10. JMLSG: Press release: Ministerial approval of JMLSG Guidance

On 20 September, the Joint Money Laundering Steering Group (JMLSG) published that it has received HM Treasury ministerial approval of revisions to Part II Sector 22 (Cryptoasset providers and custodian wallet providers) of its Guidance (Part II Sector 22).

The new guidance relates to the provisions of The Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 that implement the Travel Rule for cryptoasset transfers in the UK.

This approval is received following JMLSG's final revision to Part II Sector 22 which were published on 1 September.

Retail Services

11. FCA: Correspondence: Platforms Portfolio Supervision Strategy

On 28 September 2023, the FCA published a letter addressed to CEOs of firms providing platform services, setting out its supervision strategy in relation to such firms.

The letter outlines the key harms in the platform service provider sector, the FCA's expectations of platform service firms and a summary of the FCA's intended work in this area.

The FCA's main concerns in this area include improperly disclosed platform fees, insufficient systems and controls to protect customers from loss of investment savings or personal data, system outages and other operational resilience failures, and historic failures to properly conduct due diligence on non-standard assets.

Platform service firms should ensure they meet the obligations highlighted in the letter and the FCA's expectations on how to mitigate related harms.

The FCA will be proactively engaging with firms to evaluate their compliance.

12. FCA: Portfolio Letter: Our supervision strategy for Corporate Finance Firms

On 28 September 2023, the FCA published a portfolio letter addressed to chief executives of corporate finance firms (CFFs). The letter outlines the most likely risks to consumers and markets arising from the business model of CFFs, and sets out the FCA's strategy to address such risks and its expectations of CFFs.

The FCA sets out four supervisory priorities:

• Client categorisation: The FCA will review client categorisation practices to ensure CFFs are complying with COBS 3, and will take robust action if it finds abuse of the corporate finance contacts regime or financial promotion exemptions.
• The Consumer Duty: The FCA will investigate how CFFs consider the Consumer Duty applies to their businesses and how they are ensuring compliance. The FCA will hold senior management to account where there is a failure to comply with the Consumer Duty.
• Dealing with problem firms: The FCA will contact CFFs that do not appear to be using their regulatory permissions and ask them to vary or cancel their permissions where appropriate.
• Market abuse: The FCA expects CFFs to maintain tailored market abuse controls, as well as robust prevention cultures, systems and controls to discharge their obligations under the UK Market Abuse Regulation and be able to properly identify, record and manage conflicts of interest. The FCA will hold senior management to account where firms fail to address risks and remedy failings and to embed a culture of compliance.

If CEOs of CFFs do not consider the requirements to apply to their firm, they are asked to notify the FCA immediately.

13. FCA: Consultation: Consumer Credit (CP 23/21)

On 27 September 2023, the FCA published a consultation paper (CP 23/21) with regards to its proposal to introduce three new Product Sales Data (PSD) returns into Chapter 16 of the FCA's Supervision Manual:

• Sales PSD;
• Performance PSD; and
• Back Book PSD.

Lenders will be required to provide sales and performance data on a quarterly basis, while back book data will be provided in a one-off submission. This provision of additional data will allow the FCA to identify and assess risks in the consumer credit market.

The closing date for feedback on the consultation paper is 15 November 2023, noting the feedback received will be used by the FCA to inform its final Policy Statement that is to be published in Q1 2024.

14. FCA: New webpage: Financial Promotions for high-risk investments

On 27 September 2023, the FCA published a new webpage setting out the findings of its multi-firm review on Restricted Mass Market Investments (RMMIs). The review identifies examples of good and poor compliance practices at firms promoting high-risk investments to retail clients, with a view to the wider sector considering these findings and updating their own practices accordingly.

The findings are said to be of particular relevance to firms promoting RMMIs and non mass market investments, as well as those planning to promote relevant cryptoassets to UK retail consumers once the financial promotion rules for cryptoassets come into force.

Payments

There are no updates for this edition.

Digital Services and Fintech

15. EBA: Publication: Technical advice on MiCAR delegated acts

On 29 September 2023, the European Banking Authority (EBA) published technical advice in response to the EU Commission's Call for Advice in December 2022 on two delegated acts under the Markets in Crypto-assets Regulation (MiCAR).

The advice relates to the criteria for determining the significance of asset-referenced tokens (ARTs) and electronic money tokens (EMTs), and to the supervisory fees that may be charged by the EBA to issuers of both significant ARTs and significant EMTs.

The publication puts forward a series of core and ancillary indicators for each significance criterion (financial sector interconnectedness and activities on an international scale). In particular, the EBA proposes that the outcome of the significance assessment should ultimately be subject to a holistic/collective assessment of both types of indicators.

Furthermore, regarding the supervisory fees, the EBA has recommended criteria for distributing costs between issuers and ensures that all costs that it will incur in performance of its supervisory tasks can be charged to issuers of significant ARTs and significant EMTs (known as the full cost-recovery approach). The EBA has emphasized the need for flexibility when estimating fees due to the continuously shifting crypto-assets landscape and the potentially widening scope of its supervisory duties.

16. ESAs: Publication: Joint European Supervisory Authorities’ Technical Advice

On 29 September 2023, the European Supervisory Authorities published their technical advice in response to the EU Commission’s December 2022 Call for Advice on two delegated acts under the Digital Operational Resilience Act (DORA). The advice sets out further criteria for critical information and communication technology third party service providers and for determining the oversight fees levied on such providers.

The advice does not include any details of the designation procedure nor of the related methodology. However, the European Supervisory Authorities plan to define these details within six months of the adoption of the delegated act by the Commission.

17. FCA: Correspondence: Final warning for cryptoasset firms marketing to UK consumers and those supporting them to get ready for the financial promotion regime

On 21 September 2023, the FCA published a letter warning cryptoasset firms who market to UK consumers, including firms based overseas, to prepare for the financial promotion regime.

This letter follows a series of previous warnings from the FCA in the form of statements on their website, letters to firms and various industry engagements. It reaffirms the FCA's concerns with the lack of responses from unregistered firms, and stresses that enforcement action will be taken where these firms continue to make illegal financial promotions to UK consumers after the regime comes into force. It also outlines the FCA's expectations for those businesses that support unregistered cryptoasset firms, including social media platforms and payments firms.

ESG

18. TNFD: Publication: Taskforce on Nature-related Financial Disclosures (TNFD) recommendations

On 18 September 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published a document setting out the general requirements for all nature-related disclosures and a further set of 14 recommended disclosures.

The publication explores how environmental prosperity and economic growth are intrinsically linked, and stresses that companies and financial institutions of all backgrounds should be striving to view nature as a core and strategic risk management concern. The TNFD recommendations provide companies and financial institutions of all sizes with a risk management and disclosure framework to identify, assess, manage and, where appropriate, disclose nature-related issues.

The recommendations are voluntary, though various jurisdictions, including the UK, have already indicated that they will be incorporated into domestic policy and legislation.

For more information, please see our briefing here.

Other

19. FCA: Data: Improving the Appointed Representatives regime through greater use of data

On 28 September 2023, the FCA published its plans to strengthen the Appointed Representatives' (AR) regime and outlined its enhanced expectations of firms to minimise the harm caused by ARs.

The publication sets out the findings from the FCA's 2021 and 2022 data requests sent to principal firms, as well as from the authorisation information collected from firms, and details how the FCA has used this data to improve its understanding of the regime. It also sets out how the additional information that firms are required to provide has resulted in the FCA taking a more assertive supervisory approach.

The FCA's commitment to improve the AR regime is also set out in its Business Plan and Strategy.