Financial institutions general regulatory news, October 2020 # 3

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Recent regulatory developments of interest to all financial institutions. Updates include the latest publications relating to Brexit, COVID-19 and other EU and international publications.

Contents

  • Brexit: HM Treasury update on financial services Brexit statutory instruments
  • Draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020
  • Brexit: PRA and FCA Dear CEO letter on final preparations for end of transition period
  • COVID-19: FCA speech on market abuse
  • FCA directory of certified and assessed persons: update for solo-regulated firms
  • Artificial Intelligence Public-Private Forum launched by FCA and BoE
  • OFSI annual report
  • Future Challenges in Economic Crime: SFO speech
  • CMU: European Parliament adopts resolution on further development
  • Digital finance: European Parliament adopts resolution
  • Financial institutions' use of digital platforms: EBA survey
  • Global stablecoin arrangements: FSB high-level recommendations
  • BigTech in finance in emerging market and developing economies: FSB report
  • Use of RegTech and SupTech by regulatory authorities and regulated institutions: FSB report
  • Market fragmentation work: FSB update
  • Central bank digital currencies: central banks group report on principles and features

Brexit: HM Treasury update on financial services Brexit statutory instruments

HM Treasury has published an update on its work relating to statutory instruments (SIs) laid, or to be laid, under the European Union (Withdrawal) Act 2018 (EUWA) relating to financial services. In the statement, HM Treasury confirms that it intends to bring forward further secondary legislation under the European Union (Withdrawal Agreement) Act 2020 to:

  • replace references to "exit day" with "IP completion day" (the end of the Brexit transition period) in substantive provisions in the FS Brexit SIs, unless there is a reason for not making the amendment. This means that references to time periods based on exit day will remain the same in length: for example, a reference to "one year from exit day" will become "one year from IP completion day";
  • amend the application of the temporary transitional powers set out in Part 7 of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632) so that they are available for use by the UK regulators for a period of two years from the end of the transition period.

HM Treasury also notes amendments made by the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, which have been laid before Parliament (see below). Among other things, these Regulations update cross-references in financial services related Brexit SIs to EU regulations to refer to the onshored versions of those regulations that will come into existence at the end of the transition period.

Draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020

A draft version of the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, together with an explanatory memorandum, has been laid before Parliament.

The draft Regulations:

  • make transitional and savings provisions concerning trade repositories in relation to the Regulation on reporting and transparency of securities financing transactions (SFTR) and securitisation repositories in relation to the Securitisation;
  • amend cross-references to EU regulations in primary legislation and secondary legislation;
  • make miscellaneous amendments to a substantial number of statutory instruments, including the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/335) and (No 2) Regulations 2019 (SI 2019/1416). Among other things, these amendments ensure that all UK firms that currently benefit from an intragroup exemption from the clearing obligation on or after 21 December 2020 will also automatically have an exemption in the UK’s temporary regime; and
  • amend or revoke retained direct EU legislation, including relating to:
    • the Cross Border Payments Regulation;
    • the Alternative Investment Fund Managers Directive;
    • the Capital Requirements Regulation;
    • the Securities Financing Transactions Regulation;
    • the Single Resolution Mechanism; and
    • the EU taxonomy framework.

Different Parts of the Regulations come into force at different times as set out in regulation 1 (either on the day after the day on which they are made, IP completion day or immediately before IP completion day).

Brexit: PRA and FCA Dear CEO letter on final preparations for end of transition period

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published a joint Dear CEO letter sent to PRA-regulated firms on their final preparations for the end of the Brexit transition period. In their letter, the regulators state that firms must continue to make preparations and engage with clients and customers to minimise any disruption arising from the end of the transition period.

The letter contains a non-exhaustive list of key areas where firms may need to take final steps to ensure their preparedness. These include:

  • continuity of wholesale banking business and contracts. Among other things, the regulators expect firms to engage proactively with affected clients to complete repapering and on-boarding, and ensure that they have fully considered the impact on each client and whether the proposed changes are in each client's best interests;
  • data. The regulators consider how firms can comply with the EU's cross-border personal data transfer laws after the end of the transition period in the absence of a European Commission decision on UK data protection adequacy; and
  • retail banking customers in the EEA. Consistent with its previous guidance on this, the regulators state that firms' decisions concerning these customers should be guided by what is the right outcome for those customers and warn that, in many cases, it would be a poor outcome for the customer for the firm to suddenly stop servicing them.

COVID-19: FCA speech on market abuse

On 12 October 2020, the FCA published a speech given by Julia Hoggett, FCA Market Oversight Director, on market abuse during the COVID-19 pandemic.

Points of interest in her speech include:

  • Primary markets: Currently, appropriate controls over inside information and effective information barriers are even more critical. What constitutes inside information may change radically during the pandemic. This requires companies and their advisers to be alert to what information is likely to drive their valuation and to bring a potentially wider range of issues to be discussed at their disclosure committees.
  • Surveillance alerts and suspicious activity and order reports (STORs) in volatile markets: The dramatic increase in trading activity and volatility has led to a surge in alert volumes in firms and trading venues. The fundamentals of the market abuse offences are constant, but the ways in which risks may manifest are not, so how firms are surveilling for them needs to adapt. Firms must appropriately consider, document and govern any calibration changes. They should continue to escalate and report instances of potentially suspicious activity by considering whether the bar of "reasonable suspicion" has been met. Exceptional market conditions may impact on what is judged to constitute unusual or anomalous activity, but the process should be the same. The FCA does not expect firms to submit poor quality STORs simply because they have had more alerts. Firms with significant backlogs should advise the FCA's STOR Supervision team of the issue, its scale and anticipated timescales for clearance.
  • Surveillance and new ways of working: The FCA expects that, going forward, office and working from home arrangements should be equivalent: this is not a market for information that it wishes to see being arbitraged. Firms must update their policies, refresh their training and establish rigorous oversight reflecting the new environment, particularly regarding privately owned device use risks. Additional concerns arising from remote working relate to oversight and provision of compliance advisory teams' advice and the risk of less self-policing among front office staff, which may lead to a diminution or absence of that type of first line control. Good culture plays a key role. Compliance teams, management and leaders throughout firms should consider how they can reiterate and reinforce their expectations. Staff should be in no doubt about the standards expected of them.

FCA directory of certified and assessed persons: update for solo-regulated firms

The FCA has updated its webpage on its directory of certified and assessed persons published and maintained under the senior managers and certification regime (SMCR). It has also published a user guide for adding or amending individual directory persons data and a user guide for data attestations for directory persons.

The FCA explains that solo-regulated firms are required to submit their Directory Persons data on the FCA's Connect system. This data, which will be owned and maintained by firms, will be published on the Financial Services Register.

From mid-December 2020, the FCA will begin to incrementally display data from solo-regulated firms as that data is submitted. The deadline for submitting data is 31 March 2021, although firms can submit their information earlier than March 2021 if needed.

Firms with more than 10 directory persons can submit using the multiple add or amend submission form. The FCA will assign a timeslot for them to do so. By 12 October, the FCA will contact around 2,000 firms who it believes may want to use multiple add or amend data submission, based on the number of directory persons they employ. When it contacts firms, it will explain the dates available to use multiple data submission.

If, by 14 October, the FCA has not contacted a firm about a multiple add or amend time slot, but that firm has more than 10 directory persons and wants to use the multiple add or amend template submission method, they should note the following:

  • firms submitting before the earliest publication date should submit between 26 November and 4 December 2020. Firms can use the single submission form to submit up to 9 December and their data will appear from mid-December; and
  • firms submitting after the earliest publication date but before the 31 March deadline, should submit between 11 January and 18 March. Firms can use the single submission form to submit up to the deadline.

Artificial Intelligence Public-Private Forum launched by FCA and BoE

The FCA and the Bank of England (BoE) have launched the Artificial Intelligence Public-Private Forum (AIPPF), which aims to further dialogue between the public and private sectors to better understand the use and impact of artificial intelligence (AI) in financial services. The BoE has published a speech given at the launch by Dave Ramsden, its Deputy Governor for Markets & Banking.

The purpose of the AIPPF is to further dialogue between the public and private sectors to better understand the use and impact of artificial intelligence (AI) in financial services, including barriers to deployment, potential benefits, risks and challenges. It is expected to run for one year and will consist of a series of quarterly meetings and workshops structured around three topics: data, model risk management, and governance. The AIPPF held its first meeting on 12 October 2021.

The membership of the AIPPF comprises 21 leading AI experts from across the financial and technology sectors as well as academics. There are also observers from the Information Commissioner's Office and the Centre for Data Ethics and Innovation. The goal is to ensure that the forum's design reflects a wide variety of views.

Participation in the AIPPF is at the invitation of the FCA and BoE. The selection process is set out in its terms of reference.

The AIPPF will publish summary reports of all forum and workshop discussions and it will also aim to deliver a final report of its findings and conclusions. However, Mr Ramsden notes that the outputs of the AIPPF should not be considered as an indication of future policy by the BoE or FCA.

OFSI annual report

The Office of Financial Sanctions Implementation (OFSI) has published its annual report for the period April 2019 to March 2020. The report summarises steps OFSI has taken during the reporting period, reports OFSI received and other statistics.

Future Challenges in Economic Crime: SFO speech

The Serious Fraud Office (SFO) has published a speech, "Future Challenges in Economic Crime: A View from the SFO", given by its Director, Lisa Osofsky. In her speech, Ms Osofsky addresses issues including reforms to corporate liability, the potential Economic Crime Court and the challenges to the SFO from Brexit and COVID-19.

CMU: European Parliament adopts resolution on further development

The European Parliament has announced that it has voted in plenary to adopt a resolution calling for urgent completion of the capital markets union (CMU). It has also published a provisional edition of the resolution.

The resolution relates to the further development of the CMU, focusing on improving access to capital market finance and further enabling retail investor participation. Among other things, it calls for targeted changes to the existing financial services legislative framework, new legislation (including a legislative proposal on European secured notes (ESNs)) and a more harmonised approach to consumer protection.

Digital finance: European Parliament adopts resolution

The European Parliament announced that it has voted in plenary to adopt a resolution on digital finance. It has also published a provisional edition of the resolution.

The plenary welcomes the Commission's commitment to finalising an action plan on FinTech by Q2 2020. The resolution contains recommendations to the European Commission on digital finance with a focus on cryptoassets, cyber resilience and data protection.

Financial institutions' use of digital platforms: EBA survey

The European Banking Authority (EBA) has launched an industry survey to gather information about the use of digital platforms by financial institutions.

The survey is addressed to certain types of financial institution (credit institutions, payment institutions, electronic money institutions and firms carrying out the activity of credit provision (lending activity) pursuant to the national law of an EEA member state). The EBA asks these financial institutions to complete it if they are using, or expecting to use, within the next five years, a digital platform to market to customers, and/or conclude with customers contracts for financial products and services within the EEA.

The term "digital platform" is framed broadly so that it is model-neutral and encompasses a wide spectrum of different platform types, including financial marketplaces and platforms used by financial institutions to market or distribute different products and services. Certain platforms are excluded from the scope of the survey, including mobile banking apps or online banking tools used by a financial institution to offer core regulated services in a fully digitalised way, and platforms used only by (and for) crowdfunding service providers or for P2P lending.

The deadline to respond to the survey is 7 December 2020. The EBA states that responses will provide valuable input into its further work on platforms and potentially support the ongoing policy development in this area.

The survey forms part of the EBA's thematic work relating to FinTech and its ongoing monitoring of the regulatory perimeter.

Global stablecoin arrangements: FSB high-level recommendations

The Financial Stability Board (FSB) has published its final report and high-level recommendations for the regulation, supervision and oversight of global stablecoin (GSC) arrangements. It has also published an overview of the responses received to its April 2020 consultation on the draft report and recommendations. Broadly, respondents welcomed the draft report and found the high-level recommendations generally appropriate to address the identified issues. The FSB provides clarification on a number of issues and explains how it has amended the final report and recommendations, in the light of those responses.

As well as setting out the recommendations, the report describes GSCs and how they may differ from other cryptoassets and stablecoins, identifies the potential risks raised by GSCs, considers existing regulatory, supervisory and oversight approaches to GSCs and identifies issues that should be addressed. It also considers the specific challenges arising in a cross-border context, including the value for cross-border co-operation and coordination.

The focus of the report is on regulatory, supervisory and oversight issues relating to privately-issued GSCs primarily used for retail purposes. However, the FSB explains that it may be relevant for other types of stablecoin, including stablecoins used for wholesale market purposes and those that may pose risks to financial stability only in some countries or regions. The report may also be relevant for other cryptoassets that could pose risks similar to some of those posed by GSCs because of comparable international reach, scale and use.

The FSB will, in close cooperation with relevant standard-setting bodies, review its recommendations on a regular basis to identify any potential gaps, and update them if needed to ensure that they remain relevant and continue to promote effective regulation, supervision and oversight of GSC arrangements across jurisdictions.

Other follow up work to the FSB report and recommendations are summarised in Table 3 of the report.

BigTech in finance in emerging market and developing economies: FSB report

The FSB has published a report on BigTech firms in finance in emerging market and developing economies (EMDEs).

The report finds that the expansion of BigTech firms in financial services in EMDEs has generally been more rapid and broad-based than in advanced economies. Lower levels of financial inclusion in EMDEs have created a source of demand for BigTech firms' services, particularly in low-income populations and in rural areas where populations are underserved by traditional financial institutions. This is supported by the increasing availability of mobile phones and internet access. BigTech firms are able to reach previously underserved customers, and BigTechs can also make lending decisions based on novel sources of customer data, including from their core technology businesses. However, this expansion can also give rise to risks and vulnerabilities, including concerns about market dominance. Competition from BigTech firms may, in places, also reduce the profitability and resilience of incumbent financial institutions and lead to greater risk-taking.

The experience of EMDEs underscores the need to apply the principle of "same risk – same regulation" with respect to BigTech firms' activities, while tailoring regulatory frameworks to reflect the relative size and scope of those firms' activities. Financial authorities may also usefully contribute to the development of robust public policy and frameworks with respect to data governance, consumer protection and operational risk management.

Use of RegTech and SupTech by regulatory authorities and regulated institutions: FSB report

The FSB has also published a report on the use of supervisory technology (SupTech) and regulatory technology (RegTech) by regulatory authorities and regulated institutions. This report finds that technology and innovation are transforming the global financial landscape, presenting opportunities, risks and challenges for regulated institutions and authorities alike.

The report includes 28 case studies giving practical examples of how SupTech and RegTech tools are being used. These include a number of examples related to the COVID-19 pandemic, which has served both to increase interest, and also to illustrate where authorities have been able to deploy these solutions to support remote working, crisis response and enhanced surveillance and supervision.

Market fragmentation work: FSB update

The FSB has published a report to the G20 finance ministers and central bank governors to update them on its ongoing work on market fragmentation.

Central bank digital currencies: central banks group report on principles and features

A group of central banks and the Bank for International Settlements (BIS) have published a report on the foundational principles and core features of central bank digital currencies (CBDCs).

The report does not contain an opinion on whether to issue CBDCs, but explains that CBDC issuance and design is a sovereign decision for each jurisdiction based on an assessment of how CBDC could support public policy objectives through the provision of a safe means of payment. The report sets out foundational principles of a CBDC.

[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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