Financial institutions general regulatory news, July 2021

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

Contents:

  • UK and Singapore Financial Partnership on financial services
  • UK and Singapore negotiate on digital trade agreement
  • Financial Guidance and Claims Act 2018 (Commencement No 8) Regulations 2021
  • Draft Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order 2021
  • UK roadmap for financial services: Chancellor's Mansion House speech
  • Wholesale Markets Review: HM Treasury consultation
  • Access to cash: HM Treasury consultation
  • COP26: Treasury Committee inquiry into climate change and green finance
  • Artificial Intelligence Public-Private Forum meeting minutes
  • Regulated fees and levies for 2021/22: FCA PS21/7
  • FCA Handbook Notice 89
  • Investment Firms Prudential Regime: FCA PS21/6
  • FOS Ombudsman News 162
  • Climate-related risk and financial stability: ECB and ESRB joint report
  • CRD: EBA opinion on authorisation of investment firms as credit institutions in absence of RTS on reclassification thresholds
  • IFD: EBA final report containing draft ITS on supervisory disclosure
  • RegTech in the EU financial sector: EBA report
  • Proliferation financing risk assessment and mitigation: FATF guidance
  • Transparency and beneficial ownership of legal persons: FATF consults on potential amendments to recommendation 24
  • Money laundering from environmental crime: FATF report
  • AML and CTF programmes: Wolfsberg Group statement on demonstrating effectiveness

UK and Singapore Financial Partnership on financial services

HM Treasury has announced that it has agreed a new "Financial Partnership" between the UK and Singapore which will support increased financial services between the two countries. It states that the Partnership will facilitate closer cooperation, greater information sharing and opportunities to boost trade and investment. The Partnership is backed by a memorandum of understanding (MoU) between HM Treasury and the Monetary Authority of Singapore (MAS) on financial services regulatory cooperation. The MoU is a statement of intent by the parties to share information and to work towards promoting regulatory co-operation. It does not create or alter any legally binding obligations, confer any enforceable rights, or supersede domestic law.

The parties state that, where practicable, they will work together bilaterally and through international bodies to advance certain objectives, including enhancing financial services trade and investment between the UK and Singapore. This regulatory cooperation is intended to cover all areas of financial services.

The MoU sets out a framework for regulatory cooperation, comprised of two elements:

  • the parties state that, where practicable and where it is in their mutual interest, they will work towards the compatibility of the regulatory and supervisory frameworks for financial services in their respective jurisdictions; and
  • either party may, where practicable and permissible under its domestic legal framework, defer to the regulatory and supervisory frameworks of the jurisdiction of the other party. The MoU envisages that this deference will apply to specific areas of the parties' regulatory and supervisory frameworks. In areas where deference applies, the parties commit, among other things, to sharing information on the implementation and enforcement of regulation in that area and to take into account the impact on the other party of relevant regulatory initiatives.

The MoU also sets out the procedures that should be followed if a party withdraws a deference decision in specific area. In that scenario, the party that has decided to withdraw deference should endeavour, where practicable, to accord the other party a reasonable period of time, before reverting to the application and enforcement of the regulatory and supervisory frameworks of its own jurisdiction.

The parties also reaffirm their commitment to the annual UK-Singapore Financial Dialogue.

The MoU was signed and came into force on 30 June 2020. It will continue in operation until terminated by either party on six months' written notice to the other.

UK and Singapore negotiate on digital trade agreement

The Department for International Trade (DIT) has announced that, on 28 June 2021, the UK begins negotiations on a new digital economy agreement (DEA) with Singapore. The UK is the first European country to start negotiations on a DEA. The DIT's announcement states that a DEA would seek to remove barriers to digital trade, and enable UK exporters to expand into high-tech markets, with negotiations focusing on:

  • securing open digital markets for exporters;
  • ensuring free and trusted cross-border data flows (with high standards of personal data protection);
  • cutting red tape for UK businesses by promoting digital trade systems such as digital customs and border procedures to save time and money when exporting;
  • upholding consumer rights and protecting businesses' intellectual property (such as source code and cryptography); and
  • deepening cooperation on future growth sectors such as FinTech and strengthening collective cybersecurity capabilities.

Financial Guidance and Claims Act 2018 (Commencement No 8) Regulations 2021

The Financial Guidance and Claims Act 2018 (Commencement No. 8) Regulations 2021 (SI 2021/764) have been published. These Regulations are the eighth commencement regulations made under the Financial Guidance and Claims Act 2018 and commence provisions of the Act relating to requirements to refer individuals to pensions guidance.

Sections 18 and 19 of the Financial Guidance and Claims Act 2018 (FGCA) amend section 137FB of the Financial Services and Markets Act 2000 (FSMA) and insert a new section 113B into the Pension Schemes Act 1993 (PSA 1993) respectively.

The Regulations bring into force, on 5 July 2021, the following provisions in sections 18 and 19 of the FGCA:

  • section 18(2), for the purpose only of the making rules by the Financial Conduct Authority (FCA). These rules will require the trustees or managers of personal and stakeholder pension schemes to refer members and survivors to appropriate guidance, provided by the Money and Pensions Service (MaPS) or one of its delivery partners, as part of the application process when a member or survivor applies to access or transfer their pension benefits;
  • sections 18(3) to (6), which require the FCA consult specified persons before publishing a draft of its rules and to have regard to any regulations in force under section 113B of the PSA 1993;
  • sections 19(2) and (3), on the introduction of section 113B of the PSA 1993 for the purpose only of the making of regulations by the Secretary of State. Section 113B requires the Secretary of State to make regulations that place requirements on occupational pension schemes in England, Wales and Scotland that correspond to the rules introduced by the FCA under section 137FB of FSMA; and
  • section 19(4), which amends section 182 of the PSA 1993 to create an exception to the power of HM Treasury to direct that regulation-making powers are exercisable only in conjunction with them.

Draft Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order 2021

HM Treasury has published a draft version of the Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order 2021, together with an explanatory information.

The Order will amend the Financial Services and Markets Act (PRA-Regulated Activities) Order 2013 (SI 2013/556) as part of implementation of the Investment Firms Prudential Regime, using powers under the Financial Services Act 2021.

HM Treasury plans to lay the instrument before Parliament before the end of 2021.

UK roadmap for financial services: Chancellor's Mansion House speech

Rishi Sunak, Chancellor of the Exchequer, has delivered his Mansion House speech. Alongside the speech, HM Treasury published a new "roadmap", titled "A new chapter for financial services", detailing both the progress being made, and how the government is going further to ensure the financial services sector remains competitive now it has left the EU. The document sets out the government's vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across the UK.

Among other things, the roadmap indicates that the government intends to require businesses to disclose their risks and opportunities from, and impact on, the climate and the environment through implementing integrated "Sustainability Disclosures Requirements (SDR)". It will work closely with regulators to ensure a strong coordination across the economy for an "economy-wide regime" which will cover "real-economy corporates, financial services firms and pension schemes". It will publish a roadmap setting out its approach to sustainability disclosures ahead of COP26 (which begins 1 November 2021). The government will also work with the FCA to introduce a sustainable investment label for retain investments using information provided through the SDR.

The roadmap also flags the government's intention to consult on implementing a senior managers and certification regime for CCPs.

Wholesale Markets Review: HM Treasury consultation

HM Treasury has published its wholesale markets review consultation paper. The consultation runs until 24 September 2021.

The consultation is launched with the backdrop of Brexit and a view to tailoring the UK secondary markets regime for its domestic environment. However, the Treasury states that there is no intention to make changes for the sake of change: “The Wholesale Markets Review is not about revolutionising the rulebook but about making it nimble and fit for purpose. This is especially relevant as the government recognises that industry has faced considerable costs in adapting to new requirements following the 2008 financial crisis”.

In its introduction, the Treasury states that this package of reforms seeks to create a simpler and less prescriptive regime in the most cost-effective way, for example by:

  • clarifying the regulatory perimeter and conditions governing trading venues and systematic internalisers, so that the market can operate in confidence and promote innovation;
  • removing requirements that limit firms’ ability to execute transactions where they can get the best outcomes for investors, for example by removing the share trading obligation and double volume cap;
  • recalibrating the transparency regime for fixed income and derivatives markets, to ensure that the right instruments are subject to transparency requirements;
  • fundamentally reviewing the commodities regime, to ensure that market activity is not unnecessarily restricted, while ensuring that markets function efficiently; and
  • amending the market data regime to enable participants to identify the best available prices.

HM Treasury also seeks feedback on potential longer-term improvements that could be made to the UK regime.

Consultation responses will be considered in parallel with the Financial Services Future Regulatory Framework Review. To implement regulatory changes that will be informed by this consultation, the government intends to bring forward primary or secondary legislation as soon as parliamentary time allows. To cover the full breadth and scope of the UK’s framework, the government is working closely with the regulators. The FCA has committed to take forward any further consultations about parts of the regime that fall within its rules and guidance, and that relate to these proposals, from the second half of this year onwards.

The government has also separately published its consultation on the prospectus regime.

Access to cash: HM Treasury consultation

HM Treasury has published a consultation paper on access to cash. The paper sets out details of the government's proposed policy approach to developing legislation to protect access to cash. It seeks views on:

  • establishing geographic requirements for the provision of cash withdrawal and deposit facilities;
  • the designation of firms for meeting these requirements; and
  • establishing further regulatory oversight of cash service provision.

A consultation-stage Impact Assessment has been published alongside the consultation.

The consultation follows the government's October 2020 call for evidence on access to cash. HM Treasury has published a summary of the responses it received to this alongside its consultation paper and states that it has used the responses to inform its policy development work in this area.

The consultation closes to comments on 23 September 2021, following which the government will provide a summary of responses and set out next steps for its work.

COP26: Treasury Committee inquiry into climate change and green finance

The House of Commons Treasury Committee has published a webpage announcing the launch of a new inquiry into climate change and finance. The first oral evidence session under the inquiry will be held on 5 July 2021. Mark Carney, the Prime Minister's COP26 finance adviser and Special Envoy for Climate Action and Finance at the United Nations, will be giving evidence.

The committee is one of nine cross-party select committees (together, the "Committee on COP26") that will scrutinise preparations for the COP26 UN climate change conference to be held in Glasgow in November 2021.

Artificial Intelligence Public-Private Forum meeting minutes

The Bank of England (BoE) has published the minutes of the Artificial Intelligence Public-Private Forum's third meeting held on 15 June 2021 (published on 30 June 2021). The Forum was launched with the BoE and the FCA to help the regulators better understand the impact of artificial intelligence (AI) and machine learning (ML) on financial services. The minutes record discussion on the following topics:

  • risks arising from AI models;
  • management of risks arising from AI models; and
  • regulatory framework.

Regulated fees and levies for 2021/22: FCA PS21/7

The FCA has published a policy statement, PS21/7, on regulated fees and levies rates for 2021/22. PS21/7 sets out the periodic fees rates for 2021/22, as well as the Financial Ombudsman Service (FOS) general levy and Money and Pensions Service (MaPS), Devolved Authorities and HM Treasury illegal money-lending levies for 2021/22. The FCA also sets out feedback on the responses received to its April 2021 fees and levies consultation paper (CP21/8).

The FCA is proceeding with the proposals as consulted on in CP21/08, except in the case of the principal firms appointed representatives' fee. Stakeholders raised concerns that introducer appointed representatives should not be included as their activities are limited and therefore pose a lower risk of harm. The FCA has decided to reduce the level of this fee to £75, with the £250 fee now only applying to full appointed representatives.

Changes to the Fees manual (FEES) take effect on 1 July 2021. Firms can use the FCA's online fees calculator on its webpage to calculate their individual fees based on the final rates in PS21/7. The FCA will invoice fee-payers from July 2021 onwards for their 2021/22 periodic fees and levies.

Also, in PS21/7, the FCA states that it will be conducting a wider review of its fees structure, including all minimum fees, as part of its transformation programme and will consult on the resulting proposals.

In chapter 8 of CP21/08, the FCA consulted on its proposals for fees to recover its regulatory costs for firms that undertake the provision and distribution of pre-paid funeral plans. It is considering the comments received and, subject to FCA Board approval in July 2021, it plans to publish its response to the feedback received and final rules in the July 2021 Handbook Notice.

FCA Handbook Notice 89

The FCA has published Handbook Notice 89, which sets out changes to the FCA Handbook made by the FCA board on 24 June 2021. The Handbook Notice reflects changes made to the Handbook by the following instruments:

Investment Firms Prudential Regime: FCA PS21/6

Following its first consultation on the Investment Firms Prudential Regime (IFPR) in CP20/24, the FCA has published its first policy statement, PS21/6, on the implementation of the IFPR. PS21/6 sets out details of feedback that it received and its approach to the issues raised in feedback. PS21/6 covers aspects of the IFPR relating to, among other things:

  • the categorisation of investment firms;
  • prudential consolidation;
  • own funds and own funds requirements; and
  • reporting requirements.

The FCA published its second consultation paper, CP21/7, in April 2021 and intends to respond to this with a policy statement published in Q3 2021. It also intends to publish a third and final consultation paper on the IFPR in early Q3 2021, with the third policy statement due to be published in Q4 2021. The FCA envisages that the third consultation will cover:

  • disclosure;
  • consequential amendments to the Handbook and technical standards relating to the UK CRR;
  • issues relating to the UK implementation of the Bank Recovery and Resolution Directive and the Financial Conglomerates Directive; and
  • final application provisions.

The IFPR is scheduled to come into effect in January 2022.

FOS Ombudsman News 162

The Financial Ombudsman Service (FOS) has published issue 162 of its Ombudsman News. Items of interest include:

  • an overview (set out on an updated webpage) of the FOS' general approach to complaints about wedding insurance, including information on how firms should handle such complaints and case studies outlining how the FOS has resolved complaints in this area fairly. The FOS notes that the COVID-19 pandemic has driven a steep increase in wedding and special events insurance complaints and that it has upheld a high proportion in favour of the consumer;
  • an overview (set out on a new webpage) of the FOS' general approach to complaints about business interruption (BI) insurance. The webpage sets out information on the types of complaints the FOS has seen (in almost all cases, complaints have come to the FOS because the complainant is unhappy the insurer has turned down their claim, but in a few cases, complaints have concerned how the BI insurance was sold, a delay in considering the claim or the amount offered by the insurer in settlement) as well as case studies that illustrate and outline its approach to BI insurance complaints. The FOS confirms that, in deciding a complaint fairly, it takes account of all applicable regulations, rules and law. This includes the Supreme Court's judgment in the FCA's test case; and
  • an overview (set out on a new webpage) of the FOS' general approach to complaints about government-backed loan schemes in the context of COVID-19 (that is, the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS)). The webpage sets out information on the types of complaints the FOS has seen and case studies that illustrate and outline its approach to complaints about CBILS and BBLS.

Climate-related risk and financial stability: ECB and ESRB joint report

On 1 July 2021, the European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a joint report on climate-related risk and financial stability, with a technical supplement focusing on data and measurement issues in physical and transition risk analysis and providing a specific methodological application for each type of risk.

The report analyses a broadened set of climate change drivers over long-dated financial risk horizons, with the aim of providing a more encompassing and robust quantification of financial stability risks in the EU to underpin targeted and effective policy action.

Three climate scenarios drawn from the Network for Greening the Financial System (NGFS) are explored in the report, examining both physical and transition risk drivers as well as assumptions on climate technologies. The report's granular mapping of financial exposures to climate change drivers identifies the following forms of risk concentration:

  • exposures to physical climate hazards are concentrated at the regional level. Around 30% of the euro area banking sector's credit exposures to non-financial companies are to firms subject to a combination of physical hazards such as flooding, wildfires, heat and water stress;
  • exposures to emission-intensive firms are concentrated across and within economic sectors. For example, exposures to highly emitting firms represent 14% of collective euro area banking sector balance sheets; and
  • exposures to climate risk drivers are concentrated in specific European financial intermediaries. Approximately 70% of banking system credit exposures to firms subject to high or increasing physical risk over the coming decades are concentrated in the portfolios of only 25 banks. In addition, scope for financial market repricing associated with transition risk will be particularly large for investment funds.

The ECB and ESRB highlight the consistent finding that credit and market risk losses for EU banks, insurers and investment funds could arise from an insufficiently timely or effective climate transition. They add that, while there has been notable progress in measuring and modelling climate related risk, much remains to be done. In particular, the adequacy of reported data remains a key issue. The variability of climate-related disclosures among firms and financial institutions suggests there will be refinements as progress is made in addressing data gaps and obtaining more complete data. Ultimately, the transmission of risks to the financial system and its prospective timing must be better understood.

CRD: EBA opinion on authorisation of investment firms as credit institutions in absence of RTS on reclassification thresholds

The European Banking Authority (EBA) has published an opinion on appropriate supervisory and enforcement practices for the process of authorising investment firms as credit institutions under Article 8a of the Capital Requirements Directive (CRD). The opinion follows on from the absence of the final regulatory technical standards (RTS) on the relevant thresholds for reclassification. Member states were expected to apply measures implementing Article 8a on 26 June 2021.

The EBA considers that the absence of the final Delegated Regulation containing the RTS raises legitimate doubts over the application of Article 8(a) in the exceptional cases in which, for the purpose of determining whether the relevant thresholds have been reached, the methodology to be laid down in the RTS is relevant. However, this is not expected to affect the application of Article 8a in cases where firms are clearly reaching either of the thresholds.

The EBA recommends that, in the cases where whether the Article 8a(1) thresholds have been reached cannot be determined in the absence of the final methodology in the RTS, competent authorities should not prioritise any supervisory or enforcement action in relation to the Article 8a requirements until six months after the methodology is finalised. Competent authorities should, however, apply Article 8a in all other cases where the question of whether the threshold has been reached can be reliably determined without the final methodology.

The EBA is not expecting to finalise the draft RTS for submission to the European Commission before the end of October 2021. It requests the Commission adopt the technical standards as quickly as possible after submission by the EBA.

IFD: EBA final report containing draft ITS on supervisory disclosure

The EBA has published its final report setting out final draft implementing technical standards (ITS) with regard to the format, structure, contents list and annual publication date of the information to be disclosed by competent authorities in accordance with Article 57(4) of the Investment Firms Directive (IFD).

The draft ITS, set out in section 3 of the report, contain information on supervisory approaches and aggregate statistical data concerning the new prudential requirements that competent authorities will have to disclose publicly for all types of investment firms authorised under the Markets in Financial Instruments Directive (MiFID). Among other things, the final draft ITS include detailed templates to harmonise publication of the information, together with instructions for completing the templates.

The draft ITS state that they will enter into force twenty days after publication in the Official Journal of the European Union. They also state that competent authorities will be required to disclose this information for the first time by 30 June 2022. The EBA will submit the draft ITS to the European Commission for endorsement.

RegTech in the EU financial sector: EBA report

The EBA has published a report outlining its market analysis of the RegTech in the EU financial sector. It has also published an "at a glance" factsheet on RegTech. The report is based on several sources of information and provides insights into the following:

  • the current RegTech landscape in the EU, providing a mapping and understanding of the existing RegTech solutions, identifying the status of adoption, financial institutions' spending, the impact of COVID‐19 as well as trends and drivers;
  • the overall benefits of the use of RegTech, either developed by financial institutions or provided by RegTech providers, as well as its perceived advantages of RegTech solutions over "traditional" methods;
  • the overall challenges faced by financial institutions when using RegTech solutions and RegTech providers, when offering their service, identifying the main barriers and risks related to the adoption and use of RegTech solutions. Also considered are the risks that financial institutions could face if RegTech solutions are not properly implemented, and the main supervisory risks that may arise for competent authorities when supervising financial institutions that use RegTech solutions;
  • deep dives into five RegTech segments: anti-money laundering/countering the financing of terrorism (AML/CFT); fraud prevention; prudential reporting; ICT security; and creditworthiness assessment (CWA); and
  • a summary of findings and proposals suggesting the way forward to facilitate the scale‐up of innovation for RegTech in the EU to support the digital transformation of the EU financial sector.

The analysis of the RegTech market in the EU financial sector and proposals included in this report will form part of future policy discussions within the wider objectives of facilitation of innovation and aim to assist the European Commission's objectives included in the EU Digital Finance Strategy. The proposals are all technology neutral, meaning that the use of a specific technology is neither preferred nor prejudiced and the use of new technologies is not inadvertently prevented because of the regulatory or supervisory approaches.

Proliferation financing risk assessment and mitigation: FATF guidance

The Financial Action Task Force (FATF) has published guidance on proliferation financing risk assessment and mitigation. The guidance has been developed following its March 2021 consultation and the prior introduction, in October 2020, of new obligations on proliferation financing risk assessment and mitigation by way of amendments to FATF recommendation 1.

Transparency and beneficial ownership of legal persons: FATF consults on potential amendments to recommendation 24

The FATF is consulting on potential amendments to the FATF recommendation 24 on transparency and beneficial ownership (BO) of legal persons. The FATF aims to strengthen the international standard on BO of legal persons to ensure greater transparency about their ultimate ownership and control and to take more effective action to mitigate the risks of misuse.

The consultation closes to responses on 20 August 2021. The FATF will consider the feedback received and propose revisions to recommendation 24 for discussion at its October 2021 plenary meeting.

Money laundering from environmental crime: FATF report

The FATF has published a report on money laundering (ML) from environmental crime. It states that environmental crime covers a wide range of activities, including illegal extraction and trade of forestry and minerals, as well as illegal land clearance and waste trafficking. Perpetrators of environmental crime vary from large organised crime groups to multinational companies and individuals. They rely on both the financial and non-financial sector to launder their proceeds.

In the report, the FATF notes that the "low risk, high reward" nature of environmental crime makes for a lucrative and safe source of revenue for criminals. This is partly due to a regulatory and legal environment that is not always consistent globally and does not fully address the financial aspects and ML risks of these crimes. The FATF conducted this study to strengthen awareness of the scale and nature of criminal gains and laundering techniques for environmental crimes.

The report builds on the FATF's 2020 report on financial flows from the illegal wildlife trade on ML from environmental crime. It identifies good practices that governments and the private sector can take to disrupt the profitability of environmental crimes.

AML and CTF programmes: Wolfsberg Group statement on demonstrating effectiveness

The Wolfsberg Group has published a statement for financial institutions (FIs) suggesting ways in which they can assess risk in defined priority areas and demonstrate the effectiveness of their AML and CTF programmes.

[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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