Financial Services SpeedRead: 11 July 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. HM Treasury: 'Rocket boost' for UK economy as Financial Services and Markets Bill receives Royal Assent

On 29 June 2023, the Financial Services and Markets Bill was granted Royal Assent through the Financial Services and Markets Act 2023. The Act introduces reforms aimed at increasing the competitiveness of the UK economy and financial services system, in accordance with the relevant secondary objective of the FCA and PRA.

Key provisions of the Act include:

• enhancing scrutiny of the UK regulators (including the FCA and PRA), to ensure clear accountability, appropriate democratic input and transparent oversight;
• removing unnecessary restrictions on wholesale markets, including through implementing the key outcomes of the Wholesale Markets Review;
• protecting free access to cash under primary legislation, and introducing crucial protections for victims of Authorised Push Payment scams;
• enabling the future regulation of cryptoassets in the UK; and
• establishing regulatory 'sandboxes' to facilitate the use of new technologies in financial markets.

2. HM Treasury: UK to sign financial services agreement with EU

On 27 June 2023, HM Treasury published a press release on the signing of the Memorandum of Understanding for financial services regulatory cooperation (MoU) between the EU and the UK. The MoU is based on a shared objective of preserving financial stability, market integrity, and protecting investors and consumers, and makes provision for:

• exchanges of views and analysis on regulatory and market developments and other issues of common interest;
• a Joint EU-UK Financial Regulatory Forum;
• transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions; and
• enhanced cooperation and coordination including in international bodies (as appropriate).

The MoU does not create rights or obligations under international or domestic law.

You can read a speech on the MoU by Mairead McGuiness, the EU's Commissioner for Financial Services, Financial Stability and the Capital Markets Union, here.

3. ESMA: Publication: Exemption of MiFIR access provisions for trading venues for exchange-traded derivatives

On 14 June 2023, ESMA published a Policy Paper on the exemption of MiFIR access provisions for trading venues in relation to exchange-traded derivatives (ETDs).

The temporary exemption is available to trading venues that fall below the threshold of EUR 1 million of annual notional amount traded in ETDs. The Policy paper sets out the procedure trading venues, National Competent Authorities (NCAs) and ESMA should follow when making and approving notifications for trading venues to rely on the exemption.

4. European Parliament: Draft Report: Proposal for a regulation amending EMIR

On 14 June 2023, the European Parliament published proposed amendments to the European Commission's proposal to amend EMIR (the 'EMIR 3.0 proposals'). The amendments are intended to address many of the concerns market participants and regulators had with the previous EMIR 3.0 proposals, including:

• technical amendments to substantive obligations and provisions;
• amendments to increase clearing in the EU; and
• amendments to move the supervision of EU CCPs to ESMA.

For more information, please see our briefing here.

Governance

5. FCA: Speech: Emily Shepperd on the evolution of culture

On 26 June 2023, the FCA's Chief Operating Officer and Executive Director of Authorisations, Emily Shepperd, delivered a speech on how culture must change to meet expectations.

Key messages from the speech include:

• culture is crucial, and poor organisational culture can destroy credibility, damage consumer confidence and even threaten the existence of an organisation;
• getting culture right, including having a clear purpose, increases firms' ability to attract and retain talent;
• the FCA believes that culture underpins outcomes, and that firms with healthy cultures will be best equipped to adapt to a changing world;
• the FCA is focused on stopping 'rolling bad apples' from continuing to exhibit poor conduct when moving between firms, and the FCA expects firms to take regulatory referencing more seriously and put in place additional controls as appropriate;
• the Consumer Duty will require a significant change in many firms' cultures; and
• the FCA is taking action to 'clean up' ESG and sustainability classifications to restore credibility and confidence, and to 'prevent cynicism from destroying the market'.

Financial Crime

6. FCA: Statement following Upper Tribunal decision in case against three individuals

On 13 June 2023, the FCA published a statement following an Upper Tribunal decision overruling the FCA's decision to ban three individuals formerly employed by Julius Baer International (JBI), in relation to the action the FCA took against JBI and those individuals November 2022.

The individuals concerned referred their cases to the Upper Tribunal for an independent hearing. The Upper Tribunal has since handed down a judgement, in which it:

• did not accept the FCA's case that the individuals lacked integrity and were therefore not fit and proper;
• highlighted delays in the FCA bringing the case;
• criticised the FCA for disclosure issues and for not calling key witnesses; 'nd
• stated that the FCA had become 'anchored in its initial impressions' and was impacted by 'confirmation bias' which harmed its investigation.

The FCA statement on the Upper Tribunal decision included the following remarks:

• reiterating that the FCA was and remains successful in its action against JBI itself (for which it imposed an £18 million fine), in relation to JBI allowing improper commission payments to a finder;
• there were obvious signs that the arrangements between JBI and the finder were potentially improper and corrupt, and in the FCA's view the public interest was clearly served by examining the conduct of the individuals within JBI who were most closely involved, particularly given the risks of financial crime;
• the Upper Tribunal was critical of many aspects of the conduct of each of the three individuals, albeit it found such conduct to be negligent rather than reckless; and
• the FCA takes seriously the Upper Tribunal's recommendations, and is reviewing its disclosure processes accordingly.

Retail Services

7. FCA: Consumer Duty: Firm implementation preparedness

On 28 June 2023, the FCA published research into firms' preparedness for the Consumer Duty in advance of the implementation deadline of 31 July 2023. Key takeaways include:

• 44% of firms surveyed had completed an implementation plan for the Duty, 40% of firms said a plan was in progress and 10% of firms have not started;
• 91% of firms surveyed had a named person responsible for meeting the Duty; (a 'Consumer Duty Champion'); and
• 64% of firms surveyed believed their organisation will comply with all the requirements of the Duty by the Deadline, and 23% will comply with most of the requirements by the Deadline.

You can read the FCA's updated webpage here.

The Ashurst Financial Regulation team will be running our Consumer Duty weekly sessions on Friday 14 July, Friday 21 July and Friday 28 July, in advance of the Consumer Duty implementation deadline on Monday 31 July. If you would like to attend and have not registered, please do so here.

8. FCA: Press release: One month to go for the Consumer Duty

On 28 June 2023, the FCA published a press release setting out ten key questions for firms to consider in advance of the 31 July Consumer Duty implementation deadline. The questions seek to assess firms preparedness and cover aspects of the Consumer Duty including products and services, vulnerability, fair value assessments and communications.

The Ashurst Financial Regulation team will be running our Consumer Duty weekly sessions on Friday 14 July, Friday 21 July and Friday 28 July, in advance of the Consumer Duty implementation deadline on Monday 31 July. If you would like to attend and have not registered, please contact us.

Asset Management

9. FCA: Policy Statement (PS23/7): Broadening retail and pensions access to the LTAF

On 29 June 2023, the FCA published Policy Statement (PS23/7) entitled Broadening retail and pensions access to the Long-Term Asset Fund. The FCA proposes to expand the scope of individuals who may invest in Long-Term Asset Funds (LTAFs).

An LTAF is an authorised open-ended fund specifically designed to invest efficiently in long-term, illiquid assets. These products are inherently higher risk, and retail promotions have been restricted to professional, high net-worth, and sophisticated investors. However, the FCA has identified that there is appetite in the retail sphere for these illiquid assets in longer term portfolios with a view to diversification.

The proposed rules will recategorise LTAFs from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI). The reclassification will enable 'mass market' retail investors, as well as certain pension schemes and Self-Invested Personal Pensions (SIPPs), to invest in LTAFs. Under the proposed changes, firms will need to follow the marketing rules set out for RMMIs when marketing LTAFs to retail investors. including risk warnings and appropriateness assessments.

The FCA is also considering whether FSCS protection should be available to retail investors in LTAFs.

Payments

10. European Commission: Proposals on modernising payment services and opening financial services data

On 28 June 2023, the European Commission published proposals to 'bring payments and the wider financial sector into the digital age'.

The proposals include proposed revisions to the Payment Services regime through a third Payments Services Directive, intended to tackle and mitigate payment fraud through amended requirements relating to e-money and licensing, clarifications of exemptions, and a new exemption to improve access to cash.

The proposals also include a proposed new Regulation for Financial Data Access (FIDA), to establish clear rights and obligations to manage customer data sharing, including providing customers with full control over who accesses their data and for what purpose (the Commission's factsheet on FIDA is available here).

Digital Services and Fintech

11. The Law Commission: Final Report: Digital Assets

On 28 June 2023, the Law Commission published its Final Report on Digital Assets. The Report makes recommendations and conclusions on the need for limited and targeted statutory changes to accommodate Digital Assets in the existing legal framework, and follows a public consultation which was launched by the Law Commission last year on the status of crypto-tokens and other Digital Assets.

For more information, please see our briefing here.

12. FATF: Update on implementation of the FATF standards on virtual assets and virtual asset service providers

On 28 June 2023, the Financial Action Task Force (FATF) published a targeted update to its standards for virtual assets and virtual asset service providers (VASPs). In 2019, the FATF extended its standards on anti-money laundering and counter-terrorist financing to apply to virtual assets and VASPs, through Recommendation 15. The update includes the following findings:

• global implementation of FATF Recommendation 15 has been poor and inconsistent;
• 75% of relevant jurisdictions were not, or were only partially, compliant with the FATF standards in relation to virtual assets and VASPs; and
• more than 50% of relevant jurisdictions have made failed to take any steps with regards to the Travel Rule.

The FATF has consequentially issued an urgent call to relevant jurisdictions to rapidly implement its standards highlighting the risk of criminal or terrorist misuse of virtual assets and VASPs, detailed in Recommendation 15.

The Final Report is available here.

13. ESMA: Speech: Verena Ross, Executive Director, ESMA: Building safe digital finance markets: a collective effort

On 21 June 2023, ESMA published a speech on the need for a collective effort in building safe digital financial markets, which included discussion of the following areas:

• ESMA will adopt a phased consultation plan to develop measures under MiCA, and will consult on the measures in early July 2023, in October 2023 and in early 2024;
• the first two official applications to the DLT Pilot have been submitted and around 15 other potential applications are expected by early 2024, confirming the interest in the Pilot; and
• ESMA is working on a report to be published in 2024 on settlement efficiency in the EU, including the impact of cash penalties and a comparison between settlement with CSDs under CSDR, and settlement internalised at the level of custodians.

ESG

14. European Commission: Sustainable Finance Package

On 13 June 2023, the European Commission published a package to strengthen the EU sustainable finance framework, which included the following:

• additional EU Taxonomy criteria for environmental objectives via the EU Taxonomy Delegated Acts, expected to apply effective January 2024 (for more information on the amendments to the EU Taxonomy Regulation, please see our briefing here);
• a proposed Regulation to improve the reliability and transparency of ESG ratings activities, including requiring ESG rating providers offering services to investors and companies in the EU to be authorised and supervised by ESMA (for more information on the proposed Regulation, please see our briefing here); and
• recommendations on facilitating transition finance for firms at different starting points (or more information on these recommendations, please see our briefing here).

15. ESMA: Call for evidence: Integrating sustainability preferences into suitability and product governance

On 16 June 2023, ESMA issued a call for evidence on the integration of sustainability preferences into suitability assessments and product governance arrangements under MiFID. ESMA is seeking feedback on several topics, including:

• firms' approaches to explaining sustainable finance concepts to clients;
• firms' assessment of their clients' sustainability preferences; and
• clients' reactions and requests.

The deadline for responses is 15 September 2023.

16. FCA: Letter outlining concerns about the sustainability-linked loans market

On 29 June 2023, the FCA published a letter to stakeholders in the Sustainability-Linked Loans (SLL) market regarding its findings from its engagement with stakeholders in March and April 2023. The FCA not regulate the SLL market directly, but would like to ensure that the sustainable finance market operates well. Key findings from the FCA's engagement include:

• the SLL market could benefit from wider adoption if concerns over trust and transparency are better addressed;
• although borrowers may be able to achieve small savings on margins, these could be negated by costs and time used in negotiation, and the heightened scrutiny inherent to SLLs and targets may also deter some borrowers;
• the classification of SLLs may differ greatly between banks, and a more prescriptive framework, such as one that uses science-based targets, may help counter greenwashing concerns; and
• banks seeking to meet a sustainable finance target may be incentivised to accept more relaxed sustainable performance targets and still count that loan towards SLLs.

The FCA notes that a recently published revision of the Loan Market Association's Sustainability-Linked Loan Principles may help to tackle some of the issues facing the SLL market.

Other

17. ESAs: Consultation: DORA

On 19 June 2023, the European Supervisory Authorities (the ESAs) published a consultation on three draft Regulatory Technical Standards (RTS) and one set of draft Implementing Technical Standards (ITS) under the EU DORA:

• draft RTS on Information and Communication Technology (ICT) risk management tools methods processes and policies;
• draft RTS on the classification of ICT incidents;
• draft RTS on policy on the use of ICT services regarding critical functions; and
• draft ITS on register of information in relation to contractual arrangements on the use of ICT services provided by ICT third-party service providers.

The aim of the RTS and ITS is to ensure consistent legal frameworks in the management and reporting of ICT risks, including third-party ICT risks.

The deadline for responses is 11 September 2023. The ESAs will hold a public hearing on 13 July 2023 (and expect to submit the draft standards to the European Commission by 17 January 2024.

18. FSB: Consultation: Toolkit for financial institutions and authorities on enhancing third-party risk management and oversight

On 22 June 2023, the Financial Stability Board (FSB) published a consultation on enhancing third-party risk management and oversight through a 'toolkit' for financial institutions and financial authorities.

The toolkit will contain flexible risk-based rules, take a holistic view of third-party risk management (wider than the historically narrow focus on outsourcing), focus on critical services and rules for identifying such services consistently and flexibility through a list of common definitions and terms, and emphasise cross-order supervisory cooperation and information sharing.

The deadline for responses is 22 August 2023.