Financial Services SpeedRead: 15 December 2023 edition
15 December 2023
On 7 December 2023, the BoE (including the PRA) and FCA jointly published a consultation paper (PRA CP 26/23 and FCA CP 23/30) on operational resilience and critical third parties (CTPs) to the UK financial sector.
The consultation paper sets out proposed requirements and expectations for CTPs. The aim of these proposals is to manage potential risks to the stability of, or confidence in, the UK financial system that may arise due to a failure in, or disruption to, the services that a CTP provides to authorised persons, relevant service providers, and/or financial market infrastructure entities.
The proposals would create:
The regulators invite feedback on the proposals. The closing date for feedback is 15 March 2024 and responses are requested via email to CP26_23@bankofengland.co.uk.
On 5 December 2023, the FCA and PRA jointly published a policy statement (PS16/23) which provides feedback to responses to the PRA's consultation paper CP5/23 Remuneration: Enhancing proportionality for small firms and FCA's consultation paper CP23/11 Remuneration: Enhancing proportionality for small dual-regulated firms.
The policy statement also sets out the regulators' final policy. The final policy position has not change following CP 23/11. However, there have been some clarificatory changes to the FCA’s rules post-consultation regarding the application of proportionality to small firms in groups that include larger institutions.
The changes resulting from the policy statement came into force on 8 December 2023. The PRA Rulebook and FCA Handbook amendments apply to a firm's performance year starting on or after 8 December 2023. The PRA supervisory statement and FCA non-Handbook guidance changes also came into force on 8 December 2023.
Furthermore, the PRA published an updated supervisory statement (SS2/17) on 6 December 2023, which is intended to be read together with the relevant changes to the PRA Rulebook. The supervisory statement sets out expectations on how firms should comply with the requirements of the remuneration part of the PRA Rulebook. The updated version of the supervisory statement applies to remuneration awarded in respect of a performance year starting on or after 29 December 2020.
On 4 December 2023, the FCA published a consultation paper (CP 23/27) on its proposals to amend the commodity derivatives regulatory framework, which aims to mitigate the risk that large positions can cause disorderly pricing or settlement conditions.
The consultation is part of the Wholesale Markets Review, with the FCA using this opportunity to ensure the UK's commodity derivatives markets remain resilient under a variety of market conditions by introducing new requirements to strengthen the supervision of those markets.
The proposals set out by the consultation paper apply to trading venues in the UK which admit commodity derivatives to trading and persons (including commercial users and financial firms) who trade commodity derivatives in the UK. The FCA is consulting on the following key changes:
The consultation closes on 16 February 2024 and responses can be submitted here.
On 29 November 2023, the European Commission published a targeted consultation paper regarding the selection of a unique product identifier for public transparency in over-the-counter (OTC) derivatives transactions.
The consultation relates to the provisional agreement on the reform of the Markets in Financial Services Regulation (600/2014) (MiFIR), expected to be published in Q1 2024. The provisional agreement is intended to reform the scope of pre- and post-trade transparency reporting for OTC derivatives, including by specifying the classes of OTC derivatives which are subject to such reporting requirements to ESMA.
The paper requests feedback on what the most suitable unique product identifier would be to comply with the incoming transparency requirements, and whether there are any "additional identifying reference data" to be considered in addition to the unique product identifier.
The target audience of the consultation are participants in the "in-scope" OTC derivatives value-chain, consisting of:
Responses must be submitted via the online questionnaire by 9 January 2024.
On 28 November 2023, HM Treasury published the following three draft statutory instruments as part of its Smarter Regulatory Framework programme:
On 27 November 2023, HM Treasury published a statutory instrument (SI 2023/1258) on the Short Selling (Notification Threshold) Regulations 2023.
This instrument amends the retained EU legislation on short selling and some aspects of credit default swaps, otherwise known as the Short Selling Regulation (SSR). This includes by increasing the notification threshold for net short positions to the FCA from 0.1% to 0.2%, easing the regulatory pressures on industry, while still providing the FCA with sufficient data such that it can continue to carry out its functions.
These regulations will come into force on 5 February 2024.
On 6 December 2023, the European Commission published the adopted delegated texts regarding draft regulatory technical standards (RTS) specifying in which circumstances the conditions for identifying groups of connected clients are met.
The aim of the draft RTS is to establish the circumstances where interconnections between clients by means of a control relationship and/or an economic dependency relationship create a single risk and hence a requirement to group those clients. Further, this draft RTS, together with the EBA Guidelines 2017/15 on connected clients, are intended to create the complete framework for the identification of groups of connected clients.
The Commission shall decide within three months of receiving the draft standards whether to endorse the drafts submitted.
On 5 December 2023, the PRA published a policy statement (PS 15/23) which provides feedback to responses to multiple consultation papers in relation to the Strong and Simple Framework.
The policy statement provides feedback on the following consultation papers:
The policy statement also contains the PRA's final policy, which includes amendments to the liquidity, reporting and disclosure sections of the PRA Rulebook.
Further, the PRA has decided to rename "Simpler-regime Firms" to "Small Domestic Deposit Takers" (SDDTs), and "Simpler-regime consolidation entities" to "SDDT consolidation entities".
The rules relating to the following will come into effect from 1 January 2024:
The other rules set out in the policy statement, such as the liquidity rules, will take effect from 1 July 2024.
On 4 December 2023, the PRA published a consultation paper (CP 23/23) on the identification and management of step-in risk, shadow banking entities and groups of connected clients.
The consultation paper sets out the PRA's proposed rules requiring Capital Requirements Regulation (CRR) firms that are not small domestic deposit takers (SDDTs) and CRR consolidation entities that are not SDDT consolidation entities to continually review their step-in risk (the risk that a bank provides financial support to an unconsolidated entity that is facing stress in the absence of any contractual obligations to provide such support).
The PRA's proposals would require firms to develop their own step-in risk policies and procedures and to report their assessment to their supervisor on proposed assessment templates. The proposals develop the work done by the Basel Committee on Banking Supervision regarding its guidelines on the identification and management of step-in risk.
In addition, the paper also lays out the PRA's proposals to transfer the European Banking Authority's guidelines on "limits on exposures to shadow banking entities" and on "connected clients" to PRA Rules and supervisory statements.
The PRA invites feedback on the proposals set out in the consultation paper. The consultation closes on 5 March 2024.
On 30 November 2023, the Bank of England (BoE) published a consultation paper on the codes of practice (CoPs) that it wishes to publish under the wholesale cash distribution oversight regime.
The proposed CoPs are briefly summarised as follows:
Interested parties are requested to provide responses the consultation by 31 January 2024.
On 29 November 2023, the EBA published a consultation on draft regulatory technical standards (RTS) on the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors under Article 325az(8) of the CRR, as amended by the CRR II.
The CRR allows institutions to calculate their own funds requirement for market risk using the alternative internal model approach, provided that permission to do this is granted by the institution's competent authorities. According to the CRR, material changes to the use of the internal model approach, the extension of the use of the internal model approach, and material changes to an institution's choice of the subset of modellable risk factors require separate permissions from competent authorities, whereas other extensions and changes to the use of the internal model approach will require notification to the competent authorities.
The proposed draft RTS:
The EBA invites comments to this consultation by 29 February 2024. A public hearing of the draft RTS will occur on 10 January 2024.
On 29 November 2023, the Basel Committee on Banking Supervision (the Committee) issued a public consultation paper on a Pillar 3 disclosure framework which aims to address climate-related financial risks in the banking sector. In particular, the paper analyses how a Pillar 3 disclosure framework for climate-related risks would further its mandate to strengthen the regulation, supervision and practices of banks that are exposed to physical and transitional climate risks. It also considers how the framework would complement the work of other international bodies, such as the International Sustainability Standards Board, and enhance financial stability.
The Committee is specifically considering the integration of both qualitative and quantitative disclosure requirements, and feedback from stakeholders will be used to determine which disclosure elements will be mandatory, and which will be subject to national discretion. The Committee notes that the development of a robust Pillar 3 framework will likely be an iterative process, and welcomes views on a potential implementation date of 1 January 2026.
Submissions on the proposals are due by 29 February 2024 and can be submitted here.
On 29 November 2023, the FCA published a consultation paper (CP 23/24) on its proposals to require personal investment firms (PIFs) to be more prudent and set aside capital for potential redress liabilities at an early stage.
The FCA is concerned that PIFs are causing consumers harm as a result of significant redress liabilities falling to the Financial Services Compensation Scheme (FSCS). The FCA wants to ensure that the firms that generate redress costs are better able to meet them without recourse to the FSCS.
In summary, the proposals would require PIFs:
The FCA proposes to incorporate these changes into Chapter 13 of the Interim Prudential Sourcebook for Investment Businesses, which contains the existing prudential regime for PIFs.
The consultation paper also includes a Discussion Chapter to look at broader improvements to the prudential regime for PIFs. Alongside the consultation, the FCA also published a Dear CEO letter which reminds firms that they must not seek to avoid potential redress liabilities.
The FCA asks PIFs and other interested parties to provide comments on the consultation paper by 20 March 2024, here.
On 27 November 2023, the FCA published its final report on its multi-firm review into firms' progress in implementing the Investment Firms Prudential Regime (IFPR) in relation to the internal capital adequacy and risk assessment (ICARA) process and reporting under the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU). This follows on from the FCA's initial observations published in February 2023.
In conducting its review, the FCA focused on capital adequacy, liquidity adequacy, and wind-down planning under the ICARA process.
The FCA found that firms have made progress in understanding the requirements of the new regime. However, the FCA notes that there are still areas for improvement, including:
The Annex to the final report sets out a list of good and poor practices that the FCA observed in the multi-firm review. Investment firms and their investment firm groups should ensure their ICARA processes reflect the good practices identified by the FCA.
On 6 December 2023, HM Treasury published a policy note and draft statutory instrument for the Money Market Funds Regulations 2024, and the FCA published a consultation paper (CP 23/28) regarding proposals to enhance the resilience of money market funds (MMFs) established, marketed or managed in the UK.
The draft instrument is intended to provide the replacement framework for the current retained EU law version of the Regulation on money market funds ((EU) 2017/1131) (UK MMFR). In its policy note, HM Treasury confirms that the majority of the legislative framework under the draft Money Market Funds Regulations 2024 will remain the same as under the MMFR, with certain limited reforms.
Detailed firm-facing requirements for MMFs will sit in the FCA’s Handbook. The FCA's consultation paper sets out the proposed rules and confirms that it seeks to make the following significant changes to the current framework:
HM Treasury welcomes any technical comments on the draft statutory instrument by 24 January 2024, and the closing date for feedback on the FCA's consultation is 8 March 2024.
On 4 December 2023, the FCA published a consultation on the implementation of the Overseas Funds Regime (OFR) into its Handbook and to enable recognition of overseas funds from HM Treasury-approved jurisdictions.
This consultation aims to operationalise the OFR so that overseas funds can apply to the FCA for recognition and know which FCA rules they will need to comply with.
Further, the FCA aim to clarify its intended use of its powers, including proposals for:
The FCA invites comments on the consultation paper by 12 February 2024.
On 6 December 2023, the European Supervisory Authorities (ESAs) published a consultation paper on draft joint guidelines on the system for the exchange of information relevant to the assessment of the fitness and propriety of holders of qualifying holdings, directors and key function holders of financial institutions, and financial market participants by competent authorities.
The ESAs have developed a system which consists of a cross-sectorial database which has the aim of fostering a timely exchange of information between competent authorities. The guidelines explain how to use the ESAs' information system and exchange relevant data.
The ESAs' information system will hold information on persons who are subject to a fitness and proprietary assessment under EU sectoral provisions.
The deadline for responses is 15 January 2024. The ESAs aim to finalise the guidelines in early 2024.
On 4 December 2023, HM Treasury published an Advisory Notice announcing updates to the list of high-risk third countries made by the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No 2) Regulations 2023 (SI 2023/1306) which came into force on 5 December 2023.
Per the updated Advisory Notice, Bulgaria, Cameroon, Croatia, Nigeria, South Africa, and Vietnam have been newly classified as high-risk countries under the UK Money Laundering Regulations, while Albania, Cayman Islands, Jordan, and Panama have been removed from the list.
On 27 November 2023, the European Banking Authority (EBA) published a final report amending the EBA's revised Risk-Based Supervision Guidelines (Guidelines EBA/GL/2021/16) to extend their scope to AML/CFT supervisors of crypto-asset service providers, as defined under MiCAR.
The new guidelines set clear expectations of the steps supervisors should take to identify and manage money laundering and terrorism financing risks in the sector, while ensuring a common supervisory approach to tackling these risks.
The amended guidelines also:
The revised guidelines will apply from 30 December 2024. Competent authorities must report their compliance with these revised guidelines 2 months after the translations are published on the EBA website.
On 8 December 2023, the FCA and HM Treasury jointly published a discussion paper (DP 23/5) seeking feedback on the proposals set out in the Advice Guidance Boundary Review. The review is aimed at closing the gap between financial advice and other forms of support, with a view to building an advice and guidance framework which consumers can trust.
The discussion paper sets out three key proposals to help consumers make more informed investment and pensions decisions, including:
The closing date for feedback on the consultation is 28 February 2024.
On 8 December 2023, the FCA published a webpage detailing the objectives of its incoming consumer investment policy initiatives. In particular, the FCA has highlighted the following characteristics it hopes to see in the consumer investments sector following the introduction of a more cohesive regulatory framework:
Separately, the FCA published the findings of its consumer investments data review for April 2022 to March 2023, with this document noting that the FCA, as part of its focus on preventing serious harm to consumers in this market, had:
In addition to the data review, the FCA also published its two-year update on its consumer investments strategy, which includes a summary of the year 2 impact of the strategy and the key milestones for the FCA's incoming work over the next year. This includes a note that, to avoid double reporting, future reporting will be wrapping to the FCA's reporting against the FCA Strategy.
On 7 December 2023, the FCA published a consultation paper (CP 23/29) on its proposals to support access to cash in an increasingly digital world. The proposed regime would require certain banks and building societies designated by the government to assess and fill any actual or potential gaps in cash access provision that significantly impact consumers and businesses.
These proposals follow the government's request to seek to "ensure reasonable provision" of cash deposit and withdrawal services to personal and business current accounts. This will specifically be achieved by, amongst other things, requiring designated firms to:
The FCA is seeking feedback on the proposals by 8 February 2024, with responses to be submitted via an online response form, email or post. The FCA plans to finalise the rules on access to cash in Q3 2024 along with a policy statement, and is consulting on a transitional period that would give designated entities more time to carry out cash access assessments.
On 5 December 2023, the European Supervisory Authorities (ESAs) published an updated set of consolidated questions and answers on the Package Retail and Insurance-based Investment Products (PRIIPs) Key Information Document.
The sections of the Q&As updated include the following:
On 1 December 2023, the FCA published a new webpage discussing the expectations of firms offering fractional shares to retail investors, which follows the recent announcement by HM Treasury that it plans to allow certain fractional share contracts as ISA investments.
The FCA indicate that fractional shares are shares, despite the previous guidance from ESMA which suggested that these products are derivatives. Moreover, the FCA also appear to acknowledge that allowing access to fractional shares is positive for investors, noting it will enable them to access investments reflective of their risk appetite where they previously would not have been able to do so. The FCA has, however, also stressed that firms offering fractional shares need to act in good faith and avoid causing preventable consumer harm, while also considering whether these products are delivering good consumer outcomes in line with the Consumer Duty. Specifically, the webpage outlines several characteristics of fractional share models which firms should consider as potentially being able to impact consumer outcomes:
On 30 November 2023, the FCA published a statement relating to concerns raised about the costs and charges disclosure in the packaged retail and insurance-based investment products (PRIIPs) Key Information Document (KID), the undertakings for collective investment in transferable securities (UCITS) Key Investor Information Document (KIID), and under MiFID II requirements.
These concerns specifically reflect the FCA's view that for listed closed-ended funds the required costs and charges disclosure may not result in representative cost information being published. Concerns have also been expressed with regards to how the costs that listed closed-ended funds are required to disclose are then aggregated into other products, such as multi-asset funds that may invest in them.
Until a long term solution is finalised, the statement notes that the FCA will allow funds to provide a factual breakdown of the component parts of their costs. This is intended to enable funds to provide additional context where they are concerned that the aggregate figure currently required by legislation does not accurately reflect ongoing costs. It is, however, noted that firms will need to consider their obligations under the Consumer Duty when presenting this information.
The statement notes that any further changes that are deemed necessary before the changes to the cost disclosure regime are legislated will be communicated in a fair and transparent way, and with reasonable notice.
On 28 November 2023, Directive (EU) 2023/2673 (DMD II) was published in the Official Journal of the EU, amending Directive 2011/83/EU as regards financial services contracts concluded at a distance, and repealing Directive 2002/65/EC.
DMD II transfers consumer protections in relation to financial services distance contracts to the Consumer Rights Directive. It requires that any distance contracts concluded via an online interface shall include a withdrawal function that permits the consumer to withdraw from the relevant contract. DMD II also introduces a right for a consumer to request human intervention where they interact with a trade through fully automated online interfaces (e.g. chatbots, robo-advice and other interactive tools).
The DMD II will come into force on 18 December 2023 and will apply from 19 June 2026. Member States must adopt and publish the laws, regulations and other provisions necessary to comply with the DMD II by 19 December 2025.
For more information on changes to the Consumer Credit framework, including the introduction of DMD II, please see our briefing here.
On 8 December 2023, the European Supervisory Bodies (ESAs) published a public consultation on the second batch of policy products under the Digital Operational Resilience Act (DORA). The policy products aim to operationalise the application of DORA in the financial sector.
The second batch of policy products includes:
The ESAs are hosting an online public hearing on 23 January 2024 to present the consultation paper and address any questions raised. The public consultation on all mandates in the second batch of policy products will continue until 4 March 2024, with the deadline for submissions to the European Commission being 17 June 2024.
On 7 December 2023, the European Banking Authority (EBA) published a consultation paper on draft regulatory technical standards (RTS) that set out the requirements for policies and procedures on conflicts of interest for issuers of asset-referenced tokens (ARTs) under the Markets in Crypto-Assets Regulation (MiCAR).
The draft RTS aim to assist issuers of ARTs with managing conflicts of interest, and ensure convergence of requirements across the European Union. Specifically, the draft RTS:
The EBA is consulting on the draft RTS for a period of three months. During this time, it will be hosting a virtual public hearing on 11 January 2024 to discuss the consultation and will also be seeking feedback until 7 March 2024.
On 4 December 2023, the three European Supervisory Authorities (ESAs) published their final report amending the draft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (SFDR).
The ESAs propose:
The ESAs also propose other technical adjustments in relation to derivatives, calculating sustainable investments, and financial products with underlying investment options.
The European Commission will consider whether to endorse the draft RTS within the next three months and, if endorsed, the draft RTS will be applied independently of the ongoing comprehensive assessment of SFDR announced by the European Commission in September 2023 and before changes resulting from that assessment are introduced.
On 30 November 2023, Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds (the EU Green Bonds Regulation) was published in the Official Journal of the European Union.
The EU Green Bonds Regulation aims to fulfil objectives under the Paris Agreement with respect to financial markets, and follows the announcement that environmentally sustainable bonds would be made available under the European Green Deal Investment Plan of 14 January 2020. Specifically, the EU Green Bonds Regulation:
The EU Green Bonds Regulation will enter into force on 20 December 2023, and issuers will be able to apply the regulation from 21 December 2023. However, certain provisions will apply from 21 June 2026.
On 28 November 2023, the FCA published a policy statement (PS 23/16) confirming new Sustainability Disclosure Requirements (SDRs) and an investment labels regime, in a bid to improve the trust and transparency of sustainable investment products and reduce greenwashing.
The new measures include:
Separately, the FCA has also published a guidance consultation on the anti-greenwashing rule referenced above, which includes a request for feedback on the proposed guidance to help firms better understand the new rule and other existing, associated requirements. The closing date for feedback is 26 January 2024.
For more information on these new requirements, please see our briefing note here.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.