Financial institutions general regulatory news, July 2021 #2

Hogan Lovells

Hogan Lovells

Recent UK and EU regulatory developments of interest to most financial institutions. See also our supplementary sector specific updates in the Related Materials links.


  • MLRs 2017: Money Laundering and Terrorist Financing (Amendment) (No 2) (High-Risk Countries) Regulations 2021
  • UK FTA with Norway, Iceland and Liechtenstein
  • India-UK Financial Markets Dialogue
  • Financial stability: FSB interim report on lessons learnt from COVID-19
  • BoE Financial Stability Report and FPC summary and record
  • Resilience of market-based finance: BoE report
  • Change in control assessments: PRA letter on regulator power to object
  • Online fraud and financial promotion: FCA letter
  • Financial promotion: FCA case studies on good and bad practice
  • FCA 2021/22 business plan
  • SFDR: European Commission delays application date of RTS
  • EU Platform on Sustainable Finance draft papers on extending environmental objectives and considering social taxonomy structure
  • Pensions dashboards: EIOPA consults on technical advice
  • G20 communique: financial services aspects

MLRs 2017: Money Laundering and Terrorist Financing (Amendment) (No 2) (High-Risk Countries) Regulations 2021

The Money Laundering and Terrorist Financing (Amendment) (No 2) (High-Risk Countries) Regulations 2021 (SI 2021/827) have been made, and came into force on 13 July 2021. The Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLRs 2017) by substituting the list of high-risk third countries in Schedule 3ZA for a new list. On the new list, Ghana is no longer classed as a high-risk country for the purposes of enhanced customer due diligence requirements in regulation 33(3), and Haiti, Malta, Philippines and South Sudan are now classed as high-risk countries for the purposes of enhanced customer due diligence.

HM Treasury has also published updated advisory notices about the risks posed by unsatisfactory money laundering and terrorist financing controls and money laundering and terrorist financing controls in overseas jurisdictions.

UK FTA with Norway, Iceland and Liechtenstein

The Department for International Trade has announced that it has signed a new free trade agreement (FTA) with the three non-EU members of the European Economic Area (EEA), which are also members of the European Free Trade Association (EFTA): Iceland, Norway, and Liechtenstein. A copy of the draft agreement has been published by EFTA. Among other things, the FTA covers services and investment, including commitments to liberalise investment and cross-border trade in services. The agreement includes sector-specific commitments on financial services, recognition of professional qualifications and special visa arrangements for business travel. It also covers digital trade, including commitments to facilitate cross-border data flows, for example by prohibiting data localisation requirements.

India-UK Financial Markets Dialogue

HM Treasury has published a joint statement on the first India-UK Financial Markets Dialogue, having held the inaugural meeting. The Dialogue was established at the tenth Economic and Financial Dialogue (EFD) in October 2020 to deepen bilateral ties in the financial sector. The statement explains that financial cooperation is one of the key pillars of the 2030 roadmap adopted by the UK and India during the recent meeting of the two prime ministers. The Dialogue is one of the key elements of this cooperation. Both sides have agreed that there is significant scope for strengthened financial services cooperation.

Negotiations for a future India-UK FTA are expected to take place later in 2021.

Financial stability: FSB interim report on lessons learnt from COVID-19

The Financial Stability Board (FSB) has published an interim report on the lessons learnt from the COVID-19 pandemic from a financial stability perspective. The aim of the report, which was prepared in collaboration with standard-setting bodies, is to identify preliminary lessons for financial stability from the COVID-19 experience and aspects related to the functioning of the G20 financial regulatory reforms that may warrant further attention at the international level.

The interim report will be used to engage with external stakeholders on preliminary findings and issues raised from the analysis to date. The FSB will publish the final report in October 2021 and this will set out any next steps.

BoE Financial Stability Report and FPC summary and record

The Bank of England (BoE) has published the Financial Stability Report for July 2021 and the financial policy summary and record (FPSR) of the meetings of its Financial Policy Committee (FPC) on 30 June 2021. Both documents contain a Financial Policy Summary, with the FPSR setting out a record of the FPC's deliberations in reaching a consensus view on that summary and the contents of the FSR.

In the documents the FPC sets out its view of the outlook for UK financial stability and issues relating to the resilience of the financial system, including the:

  • FPC's approach to reducing disruptions to market‐based finance;
  • the outcome of the joint BoE-Financial Conduct Authority (FCA) review of open‐ended investment funds;
  • the use of credit sensitive rates in the transition from LIBOR;
  • the need for additional policy measures relating to cloud service providers and other critical third parties; and
  • the review of the UK leverage ratio framework.

The FPC's next policy meeting will be on 23 September 2021 and the record of that meeting will be published on 8 October 2021.

Resilience of market-based finance: BoE report

The BoE has published a report assessing the resilience of market-based finance. The report explains the FPC's framework for assessing vulnerabilities in market-based finance and past work to build its resilience. It also summarises key aspects of the "dash for cash" in March 2020 and how this was catalysed by vulnerabilities in market-based finance. In addition, the report sets out the FPC's current areas of focus, and includes international work to assess and, where necessary, remediate vulnerabilities exposed during the "dash for cash". Finally, it identifies next steps.

The report also includes the conclusions of the joint BoE and FCA review into vulnerabilities associated with liquidity mismatch in open-ended funds (reported further in our Funds and asset management regulatory news).

Change in control assessments: PRA letter on regulator power to object

The House of Commons Treasury Committee has published a letter sent to it by Sam Woods, chief executive of the Prudential Regulation Authority (PRA), which, among other things, considers the conditions for assessing a proposed change in control of a regulated firm.

Under the change in control framework set out in Part 12 of the Financial Services and Markets Act 2000 (FSMA), the appropriate regulator may only object to an application for a change in control if there are reasonable grounds for doing so on the basis of the six assessment criteria set out in section 186 of FSMA.

The PRA regards the section 186 criteria as sensible and does not consider that they need to be changed from a prudential supervisory perspective. However, it notes that, before the implementation of the Acquisitions Directive, the regulator could object to an acquisition unless it was satisfied that it was appropriate for an acquisition to take place in the light of the relevant criteria. The PRA considers that the change made by the Acquisitions Directive shifted the burden of proof. Therefore, in its letter, the PRA raises with HM Treasury the possibility of reverting to the pre-Acquisitions Directive approach. Its view is that this would assist the regulator where the position is unclear and be conducive in practice to a more robust approach to the review of acquisitions.

Online fraud and financial promotion: FCA letter

The House of Commons Work and Pensions Committee has published a letter sent to it by Nikhil Rathi, FCA Chief Executive focussing on online fraud. In the letter, Mr Rathi emphasises that the FCA continues to believe the best way to protect consumers from illegal online scams is for financial harm to be included as an online harm in the government's proposed Online Safety Bill.

The FCA calls for the Online Safety Bill to be revised to cover paid-for advertising, as well as user-generated content. Its aim is that online platforms, such as search engines and social media platforms, should be required to identify and remove fraudulent content, regardless of its content. It suggests that the duties of care in the Bill could be revised to include an obligation to prevent the communication of financial promotions that have not been approved for communication by an FCA-authorised firm. Online platforms and their senior managers would be required to implement measures including appropriate gateway systems and controls to prevent publication, steps to ensure fraudulent and misleading financial promotions are dealt with rapidly and processes that allow authorities to share intelligence on non-compliant financial promotions.

The FCA considers that the exemptions in the Financial Promotion Order (FPO) concerning high net worth and sophisticated investors are a significant vulnerability in the financial promotion regime. It states that these exemptions enable unauthorised firms to issue financial promotions to investors without complying with any of its rules and have been used to target consumers with inappropriate high-risk investments or scams. The FCA calls for changes to the ability to self-certify qualification for the exemptions and to the thresholds in the exemptions.

Mr Rathi also states that the FCA is considering the impact of the removal of exemptions in the FPO that derived from the E-Commerce Directive as a consequence of Brexit. In particular, the FCA is reviewing the operations of the major online platforms to determine whether, following these changes, they are now subject to the financial promotion restriction and, if so, whether they are compliant.

Financial promotion: FCA case studies on good and bad practice

The FCA has published a new webpage setting out video case studies to illustrate good and bad practice when promoting financial services and the FCA's expectations for promotions to be clear, fair and not misleading. The FCA warns that the examples it provides are mock scenarios and are not a comprehensive illustration of its rules. It is for firms to ensure that the promotions that they communicate or approve comply with all relevant requirements.

FCA 2021/22 business plan

The FCA has published its business plan for 2021/22 in which it sets out its aims for the forthcoming year. With the uncertainty caused by the pandemic likely to continue, the FCA is looking to build on the consumer priorities of last year's plan which focused on delivering fair value in the digital age, enabling effective consumer investment decisions, ensuring credit markets work and making payments safe and accessible. The regulator is also focused on reinforcing the effectiveness of UK wholesale markets, as well as several cross-market issues including fraud, operational resilience, ESG, and diversity and inclusion.

Read our commentary in our separate briefing: FCA Business Plan 2021 – 2022.

SFDR: European Commission delays application date of RTS

On 9 July 2021, an article published on reported that the date of application of regulatory technical standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) has been delayed from 1 January 2022 until 1 July 2022.

EU Platform on Sustainable Finance draft papers on extending environmental objectives and considering social taxonomy structure

On 12 July 2021, the European Commission published the following documents extending the EU taxonomy with regard to environmental objectives, and a draft report on a social taxonomy, both produced by the EU Platform on Sustainable Finance:

  • a consultation paper, "Report on taxonomy extension options linked to environmental objectives". In this consultation paper, the Platform examines the premises, issues and options for and against extending the EU Taxonomy "beyond green" to include significantly harmful (SH) activities and no significant impact (NSI) activities (both relating to environmental sustainability) within the overall EU sustainable finance framework. The Platform describes this paper as a work in progress. It has been published to gather feedback, which will further inform the Platform as it continues with this work; and
  • a draft report by the Platform's Subgroup 3, "Social taxonomy". In this report, the Subgroup considers the structure for a social taxonomy, as well as the relationship between the social and environmental taxonomies and the regulatory environment. It has identified four main differences between a social and an environmental taxonomy, outlined in the report. The suggested structure of a social taxonomy is both vertical and horizontal. The vertical dimension focuses on products and services for basic human needs and basic infrastructure. The horizontal dimension takes into account impacts on different groups of stakeholders affected by economic activities (workers, consumers and communities). Sustainable corporate governance is regarded as setting the bar for environmental and social sustainability in economic entities. In this area, the focus is on topics including bribery, taxation and lobbying.

On a related webpage, the Platform explains that comments are welcome on both documents until 27 August 2021. After considering responses, the Platform will submit final reports with advice to the Commission in autumn 2021. The advice will feed into the Commission's report on the potential extension of the taxonomy framework, which is to be adopted by the end of 2021 under Article 26(2a) and (2b) of the Taxonomy Regulation.

Pensions dashboards: EIOPA consults on technical advice

Following the European Commission's request for technical advice on the development of best practice for national pension tracking systems and pension dashboards, the European Insurance and Occupational Pensions Authority (EIOPA) has launched the following two consultation papers:

The consultations end on 8 September 2021. EIOPA plans to publish its final advice to the European Commission on 1 December 2021.

G20 communique: financial services aspects

The G20 has published a communique following a meeting of finance ministers and central bank governors in Venice on 10 July 2021. On financial sector-related reforms, the communique states that the G20, among other things:

  • looks forward to appraising the development of a detailed work plan on data gaps, following the International Monetary Fund concept note on a possible new data gaps initiative, prepared in cooperation with the Financial Stability Board;
  • looks forward to discussing at its October 2021 meeting the Sustainable Finance Working Group synthesis report and a multi-year G20 Roadmap on sustainable finance, initially focused on climate. It will work to promote implementation of disclosure requirements or guidance, building on the FSB's Task Force on Climate-related Financial Disclosures (TCFD) framework to prepare the way for future global coordination efforts aimed at developing a baseline global reporting standard. It also welcomes the FSB roadmap for addressing financial risks from climate change;
  • reiterates its commitment to a timely and effective implementation of the G20 Roadmap to enhance cross-border payments by relevant authorities. It looks forward to the FSB report setting quantitative global targets for addressing the challenges of cost, speed, transparency and access, which is to be delivered in October 2021. It reiterates that no global stablecoins should commence operation until all relevant legal, regulatory and oversight requirements are adequately addressed through appropriate design and by adhering to applicable standards; and
  • welcomes the Financial Action Task Force (FATF) work on money laundering risks resulting from environmental crimes and recognises the links between climate and biodiversity threats and other serious crimes. It reaffirms its commitment to implementing and strengthening global standards on beneficial ownership transparency and virtual assets regulation and supervision within its jurisdictions. It strongly supports the FATF's ongoing project to revise the current recommendation on beneficial ownership transparency.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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